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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-7449
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PEOPLE'S BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3272233
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 PLEASANT STREET
NEW BEDFORD, MASSACHUSETTS 02740
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 991-2601
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the registrant's common stock $0.10
par value per share ("Common Stock") on March 11, 1999 on the Nasdaq National
Market was $59,584,249. Although directors and executive officers of the
registrant were assumed to be "affiliates" of the registrant for the purposes of
this calculation, this classification is not to be interpreted as an admission
of such status. As of March 11, 1999, 3,675,218 shares of the registrant's
Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 18, 1999 are incorporated by reference into
Part III of this Form 10-K. Portions of the Registrant's Annual Report to
Shareholders for 1998 are incorporated by reference into Part II of this Form
10-K.
Exhibit Index appears on page 25.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company. People's Bancshares, Inc. (the "Company") is a unitary bank
holding company subject to the Bank Holding Company Act ("Act"), the principal
business of which consists of the business of People's Savings Bank of Brockton
(the "Bank"). The only significant assets of the Company are the capital stock
of the Bank and the Company's equity interest in People's Bancshares Capital
Trust, a Delaware business trust (the "Trust") formed in 1997. Although the
Company is a legal entity separate from the Bank and the Trust, the Company
itself is not engaged in any business activities. The Trust issued $13.8 million
of trust preferred securities to the public on June 26, 1997 and used the
proceeds to purchase subordinated debentures from the Company.
The Bank. The Bank was chartered as a Massachusetts mutual savings bank on
February 6, 1895. On October 30, 1986, the Bank converted to a Massachusetts
chartered savings bank in stock form. The Bank is engaged principally in the
business of attracting deposits from individuals, businesses and governments,
and investing those funds in residential and commercial mortgages, consumer,
commercial and construction loans and investments, consisting primarily of
mortgage-backed securities and trust preferred securities. The Bank originates
loans for investment with the exception of residential mortgage loans. The Bank
and its mortgage banking subsidiary originate 1-4 family residential loans
primarily for sale in the secondary market, generally with the servicing rights
of such loans. The Company sold 97%, 92%, and 93% of its 1-4 family residential
loan originations, including table funded loans, in 1998, 1997, and 1996,
respectively. Loans sold are originated by the Bank's mortgage banking
subsidiary, People's Mortgage Corporation ("PMC"), on which PMC has obtained
purchase commitments from investors prior to funding.
The Bank actively manages the purchase and sale of investments and loans
which are serviced by third parties. These purchases are funded by FHLB
advances, repurchase agreements, and municipal deposits. Such leveraged assets
amounted to $558.5 million, $414.0 million and $147.6 million at December 31,
1998, 1997 and 1996, respectively. The Bank's revenues are derived principally
from interest on its loans, interest and dividends on its investment securities,
customer fees, and gains on residential mortgage loan sales. The Bank's primary
sources of funds are customer deposits, amortization and repayment of loan and
investment principal, interest and dividends on loans and investments, maturity
or sale of investment securities, collateralized borrowings and proceeds from
the sale of loans. The Bank offers a variety of deposit accounts, including NOW
accounts, regular savings accounts, money market accounts, fixed rate
certificates of deposits and various retirement accounts.
The Bank has eight wholly-owned subsidiaries. PMC, which was organized in
March 1995, acts as the mortgage banking subsidiary of the Bank. PSB Security
Corporation I, II, and III, organized in February 1996, are "security
corporations" for Massachusetts tax purposes, and are subject to a more
favorable tax rate on income derived from securities held in them. The remaining
subsidiaries of the Bank, are primarily engaged in the management and sale of
foreclosed real estate.
MANAGEMENT STRATEGY
The Company's overall strategy is to use the Bank's traditional strengths
as a community bank specializing in real estate lending to fulfill the Bank's
commitment to satisfy the financial needs of the communities it serves. The goal
of the Bank's senior management team has been and continues to be to maintain a
strong return on stockholders' equity. Senior management has focused its efforts
on continuing the strategy established by the Board of Directors to grow
internally and through selected acquisitions. The principal components of this
strategy include:
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* Improving asset quality
* Redirecting lending efforts
* Managing interest rate risk
* Reducing non-interest expenses
* Increasing fee-based revenues
* Providing superior customer service in a cost-effective manner
* Achieving growth through carefully chosen acquisitions
Improving Asset Quality. At December 31, 1993, the Bank's non-performing
assets amounted to $8.5 million, or 4.43% of total assets and 43.08% of total
equity and loan loss allowances. The ratio of the allowance for loan losses, as
adjusted to reflect the adoption of SFAS 114, to non-performing loans at
December 31, 1993 was 56.0%. The Bank's asset quality reflected a weak regional
economy and a depressed local real estate market. The Bank had to this point
specialized in multi-family and commercial real estate lending, two areas that
were especially adversely affected by such economic conditions. During the next
60 months, the Bank was able to reduce non-performing assets by 81%. At December
31, 1998, the Bank's non-performing assets were $1.6 million, or 0.17% of total
assets, and 4.10% of total equity and loan loss allowances. The ratio of the
allowance for loan losses to non-accrual loans was 320.8%. The Bank achieved
these results through efforts to resolve existing credit problems and to avoid
future problems through a restructuring of the lending function.
Redirecting Lending Efforts. The Bank has chosen to de-emphasize
multi-family real estate and consumer lending. The Bank believes that the local
market for multi-family lending is improving, yet the Bank still maintains a
portfolio of long-term multi-family mortgages. Regarding consumer lending, the
Bank believes that it was operating at a competitive disadvantage in comparison
to large banks and non-bank lenders for home equity loans as well as indirect
and direct automobile financing. The Bank also was adversely affected by
governmental actions that diminished the attractiveness of education lending.
The Bank has instead chosen to focus its growth on 1-4 family residential, home
equity loans, residential construction, commercial, and commercial real estate
lending. Although the Bank will continue to evaluate the viability of consumer
lending, the Bank believes that prudent commercial and commercial real estate
lending will yield the highest long-term return.
Managing Interest Rate Risk. The Bank's Investment Committee, which includes
five outside directors, meets quarterly to monitor interest rate risk.
Management uses a computer based asset/liability management simulation model.
This model measures changes in net interest income by projecting the future
composition of the Bank's interest-earning assets and interest-bearing
liabilities and assessing the effect of rising, flat, and declining interest
rate scenarios within a two year horizon. The simulation model allows the Bank
to measure the effects of changing interest rate environments on net interest
margins, net income, capital, and liquidity. Management's strategy is to adjust
its assets and liabilities to diminish future possible adverse effects of
extreme changes in interest rates and to limit interest rate risk by matching
interest-earning assets and interest-bearing liabilities. Management will from
time to time allow some imbalance in the matching of interest-earning assets and
interest-bearing liabilities. Beginning in 1992, the Bank matched the pricing of
its deposit liabilities with the pricing of other banks throughout Massachusetts
as opposed to its local market competition. The Bank faces substantial
competition in its immediate deposit-gathering market from community credit
unions, which, because of their lack of state or federal taxation, are able to
offer higher deposit rates. By establishing its rates with reference to a wider
market, the Bank has been able to maintain competitive deposit rates and meet
commercial credit demands. The Bank also has aggressively pursued municipal
deposits as an alternative to higher rate borrowings.
In 1993, the Bank began to match mortgage-backed securities with the funds
borrowed to purchase such securities, which consist primarily of FHLB advances
and LIBOR-based repurchase agreements. The Bank either matches the expected
maturities of these mortgage-backed securities with the borrowed funds or
matches mortgage-backed securities secured by adjustable-rate mortgages with
short-term funding. The Bank avoids high risk
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investment instruments such as interest-only or principal-only strips in favor
of US agency and high quality private sector mortgage-backed securities. The
Bank also began investing in trust preferred securities in 1997 which offer
attractive yields. In 1997, the Bank began to purchase residential mortgage
loans with servicing retained by the seller. These purchased 1-4 family
residential loan packages exhibit many of the characteristics of mortgage-backed
securities except that the Bank earns a higher yield for assumption of credit
risk. Although this strategy results in lower financial ratios that are computed
on the basis of average assets, it increases income and return on equity, at
what the Company considers to be a low level of risk.
PMC seeks to reduce interest rate risk by not retaining or purchasing
servicing rights that would result in premiums subject to prepayment risk in a
decreasing interest rate environment. PMC also obtains purchase commitments on
all residential mortgage loans prior to their funding. This substantially
eliminates market depreciation in rising interest rate environments.
Reducing Non-Interest Expenses. The Bank has worked to reduce its cost
structure through a restructuring of its operations and through cost reductions.
During the last several years the Bank has used competitive bids for its
third-party services and supply contracts, which has contributed to the
significant improvement in its efficiency ratio from 69.6% for the year ended
December 31, 1993 to 57.7% for the year ended December 31, 1998.
Increasing Fee-Based Revenues. The Bank continues to review options to
increase revenue. Along with the match-funded investment program discussed
above, the Bank continues its efforts to increase revenues through mortgage
banking activities. The Bank's mortgage-banking subsidiary, People's Mortgage
Corporation, sells most of its mortgage loan origination volume into the
secondary market and does not retain the servicing rights. The Bank believes
that it is not large enough to make loan servicing a profitable venture. In
1994, the Bank originated $17.2 million in new mortgage loans of which $6.4
million were sold in the secondary market. The Bank originated $88.3 million,
$229.4 million, $349.7 million, and $688.9 million in new mortgage loans in
1995, 1996, 1997 and 1998, respectively, of which $63.6 million, $194.2 million,
$322.2 million, and $668.2 million, respectively, were sold in the secondary
market, including table funded loans. People's Mortgage Corporation currently
has eight loan origination offices located in Massachusetts, Rhode Island, and
Connecticut.
Providing Superior Customer Service in a Cost-Effective Manner. Management
recognizes the paramount need to manage the Bank in a safe and sound manner for
the protection of its stockholders and depositors. Although the Bank has
traditionally limited its lending activities to real estate, it plans to expand
these activities, consistent with sound banking practices, to serve other
financial needs of the community and to complement its deposit activity with
alternative investment opportunities such as annuities and mutual funds.
Management also recognizes that superior customer service combined with local
levels of decision-making authority is what distinguishes a community bank from
the much larger regional commercial banks. For these reasons, customer service
is a high management priority. At the same time, management recognizes that to
achieve its profit goals, it must provide superior service in a cost efficient
manner. Management's goal is to improve the Bank's efficiency ratio without
sacrificing its high level of customer service.
Achieving Growth Through Carefully Chosen Acquisitions. The Bank believes
that it can deliver the most value to the community and its stockholders as a
mid-sized bank combining the community-oriented and responsive service of a
smaller institution with the cost and operational efficiencies of a larger bank.
As such, the Bank sees acquisitions as a low cost profit opportunity. Through
branch acquisitions, the Bank has had the opportunity to expand into new
territories and leverage the Bank's existing management and operational
infrastructure.
RECENT DEVELOPMENTS
In 1998, the Bank restructured its branch operations to eliminate
underperforming branches and relocate to more desirable market areas. In 1998
the Bank closed the smallest of its three Taunton branches and opened a
commercial loan office in Brockton. Also, the construction of a new Brockton
branch was substantially complete in 1998. The new branch opened in early 1999
and a small Brockton branch was closed in early 1999. PMC continued to expand
its branch network in 1998, opening a branch in Portsmouth, Rhode Island.
The Company announced a second stock repurchase plan on September 1, 1998,
allowing the repurchase of up to 10% of its currently outstanding common stock
over an eighteen month period. No stock has been repurchased
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under this plan as of March 11, 1999.
On June 26, 1997, the Company raised total proceeds of $13.8 million in a
sale of subordinated debentures to People's Bancshares Capital Trust which
funded the purchase in a public offering of 1.38 million trust preferred
securities with a liquidation value of $10 each. Using interest payments made by
the Company on the debentures, the Trust pays quarterly dividends to preferred
security holders. The annual percentage rate of interest payable on the
subordinated debentures and distributions payable on the preferred securities is
9.76%. Dividends on the preferred securities will be cumulative and the Trust
may defer the payments for up to five years. The preferred securities mature in
June 2027 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to as early as June 2002. This subordinated debt
may be included in regulatory Tier 1 capital subject to a limitation that such
amounts not exceed 25% of Tier 1 capital. All such subordinated debt may be
included in total risk-based capital at December 31, 1998.
On July 17, 1997, the Company repurchased 355,000 common shares or 10% of
its outstanding stock as of June 30, 1997, at an average cost of $17.50 in an
open market transaction under a repurchase program announced on July 15, 1997.
On March 31, 1995, the Bank purchased the assets of Minuteman Funding
Corporation, a mortgage broker located in Andover, Massachusetts. On March 31,
1995, the Bank transferred the acquired assets to People's Mortgage Corporation,
a newly established wholly owned subsidiary of the Bank. The headquarters of
People's Mortgage Corporation and one of its loan production offices are located
at the Bank's headquarters in Easton, Massachusetts. In 1995, People's Mortgage
Corporation opened offices in Sturbridge, Massachusetts, and in Hamden,
Connecticut. In 1996, PMC opened a New Bedford office. In 1997, PMC opened
offices in Norwell and Wellesley, Massachusetts and closed its Sturbridge
office. In 1998, PMC opened an office in Portsmouth, Rhode Island.
In 1995 the Bank expanded its market presence in southeastern Massachusetts
through acquisitions of the branches of other financial institutions and, in one
case, through a merger with another financial institution. In July 1995, the
Bank assumed approximately $9.7 million in deposits from Haymarket Co-operative
Bank and reallocated the deposits to one of the Bank's existing branches in
Brockton. In May 1995, the Bank merged with the Bank of Taunton, A Co-operative
Bank ("Bank of Taunton") as part of a supervisory conversion of the Bank of
Taunton, with the Bank as the surviving institution. The Bank of Taunton had
total deposits of approximately $17.0 million at the time of the acquisition. In
the acquisition of the Bank of Taunton, the Bank acquired two branch offices of
the Bank of Taunton located in Taunton and East Taunton, Massachusetts. In
September 1995, the Bank acquired certain assets and assumed approximately $13.0
million of deposits of the Mansfield, Massachusetts branch of Bank of Boston.
On September 30, 1995, the Bank entered into separate Purchase and
Assumption Agreements (each, an "Agreement," and together the "Agreements") with
each of Fleet Bank of Massachusetts, National Association ("Fleet") and Shawmut
Bank, National Association ("Shawmut," and collectively with Fleet,
"Fleet/Shawmut"). The Agreements provided for (i) assumption of deposit
liabilities (the "Fleet/Shawmut Deposits") by the Bank relating to one branch of
Fleet located in Mattapoisett, Massachusetts and four branches of Shawmut
located in New Bedford (two), South Dartmouth and Taunton, Massachusetts
(together, the "Fleet/Shawmut Branches") and (ii) the acquisition of the
Fleet/Shawmut Loans and Fleet/Shawmut Assets (each as defined below) (the
"Branch Acquisitions"). The Fleet/Shawmut Branches were divested in connection
with the merger of Shawmut National Corporation into Fleet Financial Group, Inc.
At the closing of the Branch Acquisitions on March 8, 1996, the Bank
assumed the Fleet/Shawmut Deposits and paid Fleet/Shawmut a premium of 5.5% on
the average Fleet/Shawmut Deposits for the 30 days prior to the closing of the
transaction. The Fleet/Shawmut Deposits totaled $144.7 million.
In the Branch Acquisitions, the Bank acquired certain first mortgage
residential, commercial and commercial real estate and consumer loans of
Fleet/Shawmut (the "Fleet/Shawmut Loans"), as well as the real property owned or
leased by Fleet and Shawmut for operation of the Fleet/Shawmut Branches and
related automated teller machines, furniture, equipment, and other fixed
operating assets (the "Fleet/Shawmut Assets").
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The Bank acquired the Fleet/Shawmut Loans at face value and the
Fleet/Shawmut Assets at a specified purchase price with the exception of
furniture, equipment and other fixed assets, which were acquired at book value.
The Bank acquired an aggregate of approximately $113.7 million of Fleet/Shawmut
Loans. The total purchase price of the Fleet/Shawmut Assets was approximately
$1.8 million.
According to the terms of the Agreements, the obligation of the Bank and
Fleet/Shawmut to consummate the Branch Acquisitions was subject to the
satisfaction of certain conditions, including the receipt of capital financing
necessary to fund the Branch Acquisitions and enable the Bank to comply with
applicable minimum equity capital or other regulatory requirements following the
Branch Acquisitions (the "Capital Financing Condition").
To enable the Company to satisfy the Capital Financing Condition, the
Company offered shares of its Common Stock at $8.875 per share in a rights
offering to shareholders of record as of February 8, 1996 and "standby"
purchasers. The Company completed the offering on March 8, 1996, raising net
proceeds of approximately $7.5 million through the sale of 968,352 shares.
MARKET AREA AND COMPETITION
The Bank's main office is located in Easton, Massachusetts. The Bank also
has eleven other branch offices and one commercial loan office in Massachusetts,
three of which are located in the Plymouth County community of Brockton, one of
which is located in the Norfolk County community of Stoughton, two of which are
located in the Bristol County community of Taunton, two of which are located in
the Bristol County community of New Bedford, and one of which is located in each
of the Bristol County communities of Mansfield, Mattapoisett and South
Dartmouth. In 1996, the Bank relocated its service center to New Bedford,
Massachusetts. The Bank's primary market area is the City of Brockton, City of
New Bedford, and surrounding towns, including portions of Plymouth, Norfolk, and
Bristol counties. In addition, the Bank conducts its residential lending
activities principally in southern New England through its mortgage banking
subsidiary, People's Mortgage Corporation.
The Bank faces significant competition both in generating loans and in
attracting deposits. The southeastern Massachusetts area is a highly competitive
market. The Bank faces direct competition from a significant number of financial
institutions operating in its market area, many with a state-wide or regional
presence and, in some cases, a national presence. Many of these financial
institutions are significantly larger and have greater financial resources than
the Bank. The Bank's competition for loans comes principally from commercial
banks, savings banks, mortgage banking companies, credit unions and insurance
companies. Its most direct competition for deposits has historically come from
credit unions located in the Bank's market area that have been able to offer
higher deposit rates due to their exemption from federal and state taxation. The
Bank also faces competition from savings and commercial banks. In addition, the
Bank faces increasing competition for deposits from non-bank institutions such
as brokerage firms and insurance companies in such instruments as short-term
money market funds, corporate and government securities funds, mutual funds, and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
REGULATION OF THE COMPANY AND THE BANK
The Company. As a business corporation incorporated under Massachusetts
law, the Company is subject to regulation by the Secretary of State of
Massachusetts and the rights of its stockholders are governed by Massachusetts
corporate law. As a bank holding company, the Company is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") pursuant to the BHC Act.
The Federal Reserve Board has adopted capital adequacy guidelines that
generally require bank holding companies to maintain total capital equal to 8%
of total risk-weighted assets, with at least one-half of that amount consisting
of Tier 1 capital. Tier 1 capital for bank holding companies generally consists
of the sum of common stockholders' equity and perpetual preferred stock (subject
in the case of the latter to limitations on the kind and amount of such stocks
which may be included as Tier 1 capital), less goodwill and other intangibles.
Total capital consists of Tier 1 capital plus supplementary capital, which
includes hybrid capital instruments and perpetual debt; perpetual preferred
stock which is not eligible to be included as Tier 1 capital; term subordinated
debt and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted
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under the risk-based guidelines to take into account different levels of credit
risk, with the categories ranging from 0% (requiring no additional capital) for
assets such as cash to 100% for the bulk of assets which are typically held by a
bank holding company, including commercial real estate loans, commercial
business loans and consumer loans. The Federal Reserve Board also has imposed
credit conversion standards for interest rate and exchange rate contracts. In
addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum ratio of Tier 1 capital to
total assets of 3%, with most bank holding companies required to maintain a 4%
ratio. The Federal Reserve Board also declares that it will closely examine the
capital levels of bank holding companies considering expansion to ensure they
will remain strongly capitalized.
The Bank. The Bank is subject to extensive regulation and examination by
the Commissioner of Banks of Massachusetts (the "Commissioner") and by the FDIC,
which insures its deposits to the maximum extent permitted by law, and to
certain requirements established by the Federal Reserve Board. The federal and
state laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans. The laws and regulations governing
the Bank generally have been promulgated to protect depositors and not for the
purpose of protecting stockholders.
Pursuant to the FDIC's risk-based assessment system, an institution is
assigned to one of three capital groups based solely on the level of the
institution's capital -- "well capitalized," "adequately capitalized" and
"undercapitalized" -- which would be defined in generally the same manner as the
regulations establishing the prompt corrective action system under Section 38 of
the Federal Deposit Insurance Act (the "FDIA"). The three capital groups are
divided into three subgroups which reflect varying levels of supervisory
concern, from those considered to be healthy to those considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications. Beginning with the first semi-annual assessment
period of 1996, rates under these classifications will range from 0% for well
capitalized, healthy institutions to 0.27% for undercapitalized institutions
with substantial supervisory concerns, subject to a statutory requirement that
all institutions pay at least $2,000 annually for FDIC insurance.
The FDIC has promulgated regulations and adopted a statement of policy
regarding the capital adequacy of state-chartered banks which, like the Bank,
are not members of the Federal Reserve System. These requirements are
substantially similar to those adopted by the Federal Reserve Board regarding
bank holding companies, as described above.
The federal banking agencies continue to consider capital requirements
applicable to banking organizations. The federal banking agencies have adopted
amendments to their risk-based capital regulations to provide for the
consideration of interest rate risk in the determination of a bank's minimum
capital requirements. The amendments presently do not codify a measurement
framework but rather more generally require that banks effectively measure and
monitor their interest rate risk and that they maintain capital adequate for
that risk. The agencies also have published a joint policy statement to gather
information to eventually establish an explicit capital charge for interest rate
risk. In addition, the federal banking agencies have adopted amendments to their
risk-based capital standards to provide for the concentration of credit risk and
certain risks arising from nontraditional activities, as well as a bank's
ability to manage these risks, as important factors in assessing a bank's
overall capital adequacy. Failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available for federal regulatory authorities, including the termination
of deposit insurance by the FDIC and seizure of the institution.
At December 31, 1998, the Bank was in compliance with all minimum Federal
regulatory capital requirements which are generally applicable to FDIC-insured
banks. As of such date, the Bank's Tier 1 risk-based capital ratio and total
risk-based capital ratio equaled 9.15% and 10.22%, respectively, and Tier 1
leverage capital ratio equaled 5.18%.
In response to a Massachusetts law enacted in 1996, the Commissioner has
proposed rules that generally would give Massachusetts banks powers equivalent
to those of national banks. The Commissioner also has adopted procedures
expediting branching by strongly capitalized banks.
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In 1996, Massachusetts enacted interstate banking laws in response to the
Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994. The laws
permit, subject to certain deposit and other limitations, interstate
acquisitions, mergers and branching on a reciprocal basis. The new interstate
banking law is likely to make it easier for out-of-state institutions to attempt
to purchase or otherwise acquire or to compete with the Bank in Massachusetts,
and similarly makes it easier for Massachusetts banks to compete outside the
state.
Certain Other Regulatory Matters. In granting its approval of the
reorganization in which the Bank became a wholly owned subsidiary of the Company
(the "Reorganization"), the Commissioner included a provision which requires the
Bank and the Company to maintain Tier 1 leverage capital ratio of at least 4%,
which is equivalent to the minimum Tier 1 leverage capital ratios of the FDIC
and Federal Reserve Board. The Commissioner has indicated to the Bank that this
minimum capital requirement is not related to the Bank's financial condition but
instead reflects the policy of the Commissioner to impose minimum capital
requirements with respect to all one-bank holding company formations. The
approval also provides that if the Bank's Tier 1 leverage capital ratio is below
4%, the Bank must seek Commissioner approval before paying dividends to the
Company.
Regulation Under Federal Securities Laws. Upon consummation of the
Reorganization, in which the Company acquired the stock of the Bank, the
reporting obligations of the Bank under the Exchange Act, as administered by the
FDIC, were replaced with substantially identical obligations of the Company
under the Exchange Act, as administered by the Securities and Exchange
Commission ("SEC"). Pursuant to the Exchange Act, the Company files annual,
quarterly and periodic reports with the SEC. The Company's officers and
directors are also subject to the insider trading requirements of Sections 16(a)
and 16(b) of the Exchange Act as administered by the SEC. In connection with the
Reorganization, the Bank deregistered the Bank's common stock under the Exchange
Act.
The foregoing references to laws and regulations which are applicable to
the Company and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
LOAN PORTFOLIO
The Bank's commercial and consumer lending activities are conducted
principally in southeastern Massachusetts and the Bank's residential lending
activities are conducted principally in southern New England. In addition, the
Bank purchases residential mortgage loans with servicing retained by the seller.
The Bank's loan portfolio includes single family and multifamily residential
loans, commercial real estate loans, commercial loans, and a variety of consumer
loans. In addition, the Bank grants loans for the construction of residential
homes, commercial real estate properties, and for land development.
Approximately 90% of the loans granted by the Bank are secured by real estate
collateral. The ability and willingness of the single-family residential and
consumer borrowers to honor their repayment commitments is generally dependent,
among other things, on the level of overall economic activity within the
borrowers' geographic areas and real estate values. The ability and willingness
of a commercial real estate, commercial, or construction loan borrower to honor
its repayment commitments is generally affected by changing economic conditions
in the borrower's particular geographic area, business or industry that could
impair the borrower's future operating performance.
At December 31, 1998, the Bank had net loans and loans held for sale of
$487.7 million of which $476.2 million, or 98%, were mortgage loans. The Bank
also had $16.4 million of other loans not secured by real estate composed of
commercial and consumer loans other than home equity loans. Of the Bank's total
loans and loans held for sale, 81% were secured by 1-4 family residential
mortgages, 11% by commercial properties, 2% by multi-family properties, and 3%
represent residential construction loans. Of the Bank's loans not secured by
real estate, 2% of total loans are small business commercial loans not secured
primarily by commercial real estate and 1% of total loans are to consumers.
The types of loans that the Bank may originate are subject to federal and
state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are, in
turn, affected by general economic
8
<PAGE> 9
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies, and governmental budgetary matters. The
following table presents the outstanding balance of loans as of the end of the
years indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands)
Mortgage Loans:
<S> <C> <C> <C> <C> <C>
Residential 1-4 family $ 321,612 $ 293,402 $ 160,730 $ 67,641 $ 56,533
Residential multi-family 11,264 11,030 11,217 9,366 9,362
Commercial real estate 54,104 44,714 44,149 30,019 25,510
Construction 20,118 11,162 7,359 8,459 4,383
Equity lines of credit 10,197 10,152 10,297 7,274 7,718
--------- --------- --------- --------- ---------
Total principal balances 417,295 370,460 233,752 122,759 103,506
Deferred loan origination (fees)
costs, net (56) (113) (49) 57 (32)
Less undisbursed amount
of loans in process (4,975) (2,239) (1,450) (3,623) (948)
--------- --------- --------- --------- ---------
Total mortgage loans 412,264 368,108 232,253 119,193 102,526
--------- --------- --------- --------- ---------
Other Loans:
Retail installment sales contracts 375 915 1,830 2,620 3,203
Consumer 4,806 5,007 6,161 2,423 2,783
Commercial lines of credit 5,030 6,089 5,622 3,462 2,602
Commercial loans 6,098 6,433 4,838 5,597 2,774
Education 71 146 207 296 409
--------- --------- --------- --------- ---------
Total other loans 16,380 18,590 18,658 14,398 11,771
--------- --------- --------- --------- ---------
Total loans 428,644 386,698 250,911 133,591 114,297
Allowance for loan losses (4,866) (4,291) (4,716) (3,813) (3,194)
--------- --------- --------- --------- ---------
Loans, net $ 423,778 $ 382,407 $ 246,195 $ 129,778 $ 111,103
========= ========= ========= ========= =========
</TABLE>
At December 31, 1998, the Bank had eighteen credit relationships exceeding
$1 million in size that aggregated $35.7 million or 8.3% of total loans. All of
these relationships are composed of performing loans. All non-performing credit
relationships are under $500,000.
Residential Mortgage Lending. The Bank offers first mortgage loans and home
equity lines of credit secured by 1-4 family residences. Typically, such
residences are single family homes that serve as the primary residence of the
owner. Loan originations are generally obtained from existing or past customers
and referrals from real estate agents, builders, and members of communities to
which the Bank provides services.
Before 1995, the Bank originated loans through its retail branch system. In
1995, the Bank formed a wholly owned subsidiary, People's Mortgage Corporation
("PMC"). Through PMC, the Bank seeks to expand its residential loan origination
market share and profitably increase revenues from loan sales. PMC approves new
loans only after obtaining purchase commitments from investors. Currently, PMC
secures such commitments on a loan-by-loan basis. PMC uses commissioned loan
originators to obtain 1-4 family residential mortgages based upon investors'
underwriting standards, which may differ from those of the Bank. The Bank's
strategy is to sell new loans originated by PMC in the secondary market,
including the related servicing rights. However, as part of its asset/ liability
management strategy, or to accommodate borrowers who desire a local servicer,
the Bank may buy 1-4 family residential mortgages from PMC. The Bank's policy is
to purchase ARMs that meet FNMA or FHLMC underwriting guidelines, except that
loans may exceed the maximum loan limits of FNMA or FHLMC. In 1996, the Bank
began to purchase residential mortgage loans with servicing retained by the
seller. During 1996, 1997 and 1998, the Bank purchased $13.2 million, $146.6
million, and $174.7 million, respectively, of these loan packages, which include
loans originated throughout the United States. These purchased 1-4 family
residential loan packages
9
<PAGE> 10
exhibit many of the characteristics of mortgage-backed securities except that
the Bank earns a higher yield for assumption of credit risk.
Prior to 1995, the Bank originated fixed-rate 1-4 family residential
mortgage loans to sell in the secondary market after first obtaining purchase
commitments from investors. During this period, the Bank both originated ARMs
for sale in the secondary market, after first obtaining purchase commitments
from investors, and for the Bank's portfolio to the extent consistent with its
asset/liability management strategy.
At December 31, 1998, 81% of the Bank's total loans and loans held for sale
were secured by 1-4 family residential mortgages, of which 54% were ARMs.
Generally, ARMs pose credit risks that differ from the risks inherent in
fixed-rate loans because the borrower's payments rise as interest rates rise,
thereby increasing the potential for default. However, long-term fixed-rate
mortgages expose the Bank to higher interest-rate risk.
Commercial Real Estate Lending. Of the Bank's loans at December 31, 1998,
11% were secured by commercial properties that typically have terms of 3 years
or less and that are ARMs. Of loans secured by properties other than 1-4 family
residences, 77% are ARMs. These loans are made to owners who use properties for
business purposes (owner-user properties) or rent the properties to other
businesses (commercial investment properties). While the Bank suffered
significant losses on these properties in the past, most of these losses
occurred on loans originated before the installation of the Bank's current
senior management team. The Bank believes that such loans, underwritten and
monitored prudently, should be a focus of its loan growth, along with commercial
lending to small businesses.
Loans made on commercial investment properties are based upon several
factors. These include the property's sustainable cash flow, expenses, quality
of tenants, location, and market factors such as the demand for similar
properties. Management reviews such loans at least annually through the analysis
of market trends, property cash flows, financial statements, and federal income
tax returns. When it appears that such loans are in danger of becoming
collateral dependent through the properties' inability to generate or achieve
sustainable cash flows to service the debt, then the Bank will assign the credit
to its internal "Classified and Watch List Loan Report" to closely monitor the
loan and assess the likelihood of loss.
Loans made on commercial owner-user properties include loans made to small
and medium sized local businesses where the underlying collateral is
predominantly commercial real estate used by the business. The Bank underwrites
such loans on the borrower's cash flow and ability to service debt from earnings
and seeks to structure such loans to have more than one source of repayment. The
borrower is required to provide the Bank with sufficient information to allow an
informed credit decision to be made. This generally includes three years of
financial statements, projected cash flows, current financial information on
guarantors, and reports that show financial trends such as accounts receivable
agings and concentrations, inventory reports, accounts payable reports, and
sales reports. The Bank considers such loans to be a focus for future loan
growth.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than 1-4 family residential mortgage loans.
Because payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject largely to the then prevailing conditions in the real
estate market or the economy. The Bank seeks to minimize these risks through its
underwriting standards.
Commercial Lending. Of the Bank's loans at December 31, 1998, 2% are small
business commercial loans not secured primarily through commercial real estate.
Such loans are underwritten using the same standards as for commercial
owner-user real estate properties. The Bank considers such loans to be a focus
for future loan growth.
The Bank's commercial loans are usually secured by all the borrower's
business assets. Commercial loans are generally larger and involve a greater
degree of risk than 1-4 family residential mortgage loans. Because payments on
commercial loans secured by business assets are often dependent on the
successful operation of the business, repayment of the loans may be dependent
largely on the then prevailing conditions in the economy. The Bank seeks to
minimize these risks through its underwriting policies.
Residential Construction Lending. Of the Bank's loans at December 31, 1998,
3% represent residential construction lending. Such lending is to local real
estate developers who have a proven track record in successfully
10
<PAGE> 11
responding to residential home building cycles or to individuals who are
contracting to build homes for their use. The Bank considers such loans to be a
focus for future loan growth.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the Bank may
be confronted with a project that when completed, has a value that is
insufficient to assure full repayment. The Bank seeks to minimize these risks
through its underwriting policies.
Consumer Lending. Of the Bank's total loans at December 31, 1998, 1% are
consumer loans. At December 31, 1990, 13% of the Bank's total loans were
consumer loans. The decrease can be attributed to the increasing competition of
non-bank lenders for automobile and personal loans as well as the effect of
government actions on education loan originations. The Bank does not consider
this area to be a focus of future loan growth, but offers such loans as an
accommodation to deposit customers.
Multi-Family Residential Lending. Of the Bank's loans at December 31, 1998,
2% were secured by multi-family properties. The Bank historically suffered a
high level of loss in this area as well as in non-owner occupied 1-4 family
residential loans. As such, the Bank rarely makes such loans, except to
facilitate sales of foreclosed properties or to replace existing borrowers with
borrowers who are more financially secure.
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than 1-4
family residential mortgage loans. Because payments on loans secured by
multi-family properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to the then prevailing conditions in the real estate market or
the economy. The Bank seeks to minimize these risks through its underwriting
policies.
Credit Administration. The Board of Directors, through its policies and
procedures, has directed the management team to be proactive in its risk
management. This process involves the implementation of systems that promote the
identification of credit risk and actions that mitigate such risk. Management
plays an active role in promoting a credit culture in which each employee
involved in the lending function is expected to manage the risk in the portion
of the portfolio for which such employee is responsible with systems that
provide management with important information on a frequent basis.
Approval Process. The Bank uses a committee process to approve its loans.
Loans over $250,000 and up to and including $500,000 must be authorized by the
Credit Committee, including four members of the Bank's senior management team.
Loans over $500,000 are submitted to the Executive Committee of the Board of
Directors. If any proposed loan has an exception, the Bank requires approval of
the Board of Directors or Executive Committee. The Executive Committee meets
bi-weekly to approve loans and review reports pertaining to the portfolio's
performance.
Management may also delegate loan authority to certain senior loan
officers, whereby the designated officer may lend up to pre-established limits,
provided that the loan meets minimum underwriting criteria and is documented
according to the Bank's customary procedures. These loans are subsequently
reported to senior management and the Executive Committee.
Credit Administration Oversight. The Bank's credit administration
department uses various systems to monitor the loan portfolio and lending
activity. These include reports generated by the Bank's data processing system
to monitor loan performance.
The Board of Directors requires that all loans be classified on a grading
system according to measurable elements of risk. The system used is standard
throughout the banking industry and recognized by the Bank's primary regulators,
the Commissioner and the FDIC. This system allows management to track pools of
similar credits for potential risk of loss. These pools consist of same grade
credits that have similar levels of risk and establish a framework for migration
analysis used to determine the levels of loan loss reserves.
The grading system assigns loan pools to seven categories ranging from
"pass" to "loss." There are three pools
11
<PAGE> 12
in the "pass" category, which consists of credits found to be of acceptable
risk. Generally, loans in this category are to companies that have profit
records, adequate capital for normal operations, and sufficient cash flow to
service the loan. When a loan shows signs of potential weaknesses that may
affect repayment of the loan or the collateral, the loan is reclassified as
"specially mentioned." A loan that has further deterioration and exhibits
defined weaknesses in the borrower's capacity to repay is reclassified as
"substandard." Loans that exhibit signs of doubtful repayment are graded
"doubtful" and loans that show signs of partial or full loss are charged off
immediately.
Management provides its lenders with training and systems to monitor the
risk of credits and requires a formal process to change the risk grade. When a
credit is downgraded, or the risk element has increased due to some potential
repayment weaknesses, the credit is given more attention to protect the Bank's
ability to collect the loan.
Portfolio Reviews. The Bank uses a "loan officer driven" grading system,
whereby all loans are periodically reviewed by loan officers as well as
management for common risk trends. The loan officers prepare a quarterly report
for management that reviews all the loans for changes in risk and identifies
areas for growth opportunities. This process allows management to proactively
monitor the portfolio for problems and, if needed, take action to mitigate risk.
Classified Asset Management. All classified assets and specially mentioned
credits that are currently outstanding or recently downgraded are reported to
management monthly, but in any case not less frequently than quarterly. These
reports are prepared by the Credit Administrative Officer and draw attention to
the credit problems, strategies to correct the same, and dates for accomplishing
the strategies. The reports also point out projected weaknesses or strengths
that could cause the credit to be downgraded or upgraded.
When evaluating the reports, management determines if specific reserves
should be set up on the relevant credit, depending on the nature of the problem
and the underlying collateral. During this process, management evaluates the
borrower's cash flow and underlying collateral value. If there is erosion in
either case, prompt action is taken to protect the Bank's position. Such actions
may include taking additional collateral, obtaining further guarantees,
declaring a default and accelerating the loan, and such other legal remedies as
may be available to the Bank pursuant to the loan documents to take control of
the collateral. Each month management provides reports to the Board of Directors
analyzing the allowance for loan losses, foreclosed properties, classified and
non-performing assets, and loan charge-offs.
The reports are summarized on a tracking system used to monitor the
activity of the credits both for changing loan balances and required reporting
based on the initial target dates set by management.
The allowance for loan losses has been established to absorb estimated
losses in the loan portfolio. The provision to and the level of the allowance
are evaluated on a periodic basis by management and the Board of Directors. The
following presents the allocation of the allowance for loan losses:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------- --------------------- --------------------- ---------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
each each each each each
Amount Category to Amount Category to Amount Category to Amount Category to Amount Category to
of Total of Total of Total of Total of Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1-4
family and loans
held for sale $ 950 78.26% $ 932 77.30% $ 464 67.37% $ 270 52.53% $ 159 49.45%
Residential
multi-family 697 2.29 763 2.68 733 4.06 808 6.75 805 8.19
Commercial
real estate 1,238 10.98 1,222 10.86 1,405 15.96 1,514 21.63 1,249 22.31
Construction 151 3.07 89 2.17 59 2.14 48 3.48 35 3.00
Equity lines
of credit 102 2.07 102 2.47 103 3.72 79 5.24 84 6.75
Other loans 564 3.33 507 4.52 474 6.75 235 10.37 234 10.30
Unallocated 1,164 N/A 676 N/A 1,478 N/A 859 N/A 628 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $4,866 100.00% $4,291 100.00% $4,716 100.00% $3,813 100.00% $3,194 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
In addition, the allowance incorporates the results of measuring impaired
loans as provided in:
12
<PAGE> 13
* Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan" and
* SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures concerning impaired loans.
The general allowance is calculated by applying loss factors to outstanding
loans based on the internal risk grade of those loans. Changes in risk grades of
both performing and non-performing loans affect the amount of the general
allowance. Loss factors are based on our historical loss experience and may be
adjusted for significant factors that, in management's judgement, affect the
collectibility of the portfolio as of the evaluation date.
Loss factors for graded, ungraded and pooled loans are based on long-term
industry benchmarks for losses adjusted for the particular attributes of the
Company's portfolio. Such factors are derived based upon the collective wisdom
and experience of management, examiners and auditors. Management annually
reviews loss factors to determine if there has been significant changes in the
risks inherent in a particular sector of the loan portfolio to justify changing
loss factors. Management believes that a problem loan is a problem loan
irrespective of the current economic environment and that adjustment of loss
factors to reflect temporary conditions would be imprudent.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred.
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in determining the
general and specific allowances. The evaluation of the inherent loss regarding
these conditions involves a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments. The conditions
evaluated in connection with the unallocated allowance include the following
conditions that existed as of the balance sheet date:
* then existing general economic and business conditions affecting our
key lending areas.
* credit quality trends, including trends in nonperforming loans
expected to result from existing conditions.
* collateral values
* loan volumes and concentrations
* seasoning of the loan portfolio
* specific industry conditions within portfolio segments
* recent loss experience in particular segments of the portfolio
* duration of the current business cycle.
* bank regulatory examination results and
* findings of our internal credit examiners.
Executive management reviews these conditions periodically in discussion with
our senior credit officers. If any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of this condition may be
reflected as a specific allowance applicable to this credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss concerning this condition is
reflected in the unallocated allowance.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually incurred for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. The loss migration model is used to establish yearly budgeted
loan loss provisions. Similarly, by basing the expected losses on loss
experience over the last five years, the methodology is designed to take our
recent loss experience into account. Furthermore, our methodology permits
adjustments to any loss factor used in the computation of the general allowance
in the event that, in management's judgement, significant factors that affect
the collectibility of the portfolio as of the evaluation date are not reflected
in the loss factors. By assessing the probable estimated
13
<PAGE> 14
losses inherent in the loan portfolio periodically, we are able to adjust
specific and inherent loss estimates based upon any more recent information that
has become available.
Entering 1998, our loan loss provisioning based upon our forecast level of
non-performing loans indicated that $600,000 would be an appropriate level to
replace expected charge-offs. This would have indicated an expected charge-off
rate of approximately 20% versus a five year average charge-off rate of 22% of
average non-performing assets. Expected decreases in non-performing assets were
forecast to drop 4% against an economic background of an expected slow down in
U.S. and local market growth rates.
During 1998, it became clearer that the budgeted forecasts understated the
improvement in levels of non-performing assets and overstated the levels of
actual losses incurred. However, there also occurred a significant decrease in
business sentiment as to the future prospects of the economy with wide spread
forecasts of possible impending recessionary conditions. It was against this
background that management decided to maintain the same level of loan loss
provisioning in the second half of 1998 as in the first half of the year.
The following table presents a summary of the Bank's loan loss experience:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,291 $ 4,716 $ 3,813 $ 3,194 $ 3,654
Provisions for loan losses 600 100 75 525 807
Charge-offs:
Residential 1-4 family (309) (433) (463) (438) (202)
Residential multi-family (188) (161) (470) (433) (777)
Commercial real estate (23) (45) (89) (235) (519)
Equity lines of credit (17) -- (20) (30) (7)
Other (38) (88) (89) (60) (105)
------- ------- ------- ------- -------
Total (575) (727) (1,131) (1,196) (1,610)
Recoveries 550 202 307 143 343
------- ------- ------- ------- -------
Net loans charged off (25) (525) (824) (1,053) (1,267)
Allowance acquired in acquisition -- -- 1,652 1,147 --
------- ------- ------- ------- -------
Balance at end of year $ 4,866 $ 4,291 $ 4,716 $ 3,813 $ 3,194
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the year 0.01% 0.17% 0.34% 0.83% 1.15%
</TABLE>
Non-performing loans amounted to $1.5 million $3.9 million, $3.9 million,
$4.8 million, and $2.3 million, at December 31, 1998, 1997, 1996, 1995, and
1994, respectively. If prior periods had been restated for the adoption of SFAS
114, non-performing loans would have amounted to $4.7 million at December 31,
1994.
Included in non-performing loans were $859,000, $1.7 million, $2.3 million,
$1.3 million, and $1.2 million of loans that were troubled debt restructurings
at December 31, 1998, 1997, 1996, 1995, and 1994, respectively. In addition, the
Bank had troubled debt restructurings totaling $849,000, $339,000, $355,000,
$631,000, and $1.0 million at December 31, 1998, 1997, 1996, 1995, and 1994,
respectively, that were accounted for on the accrual basis as they performed
under the restructured terms for a reasonable period, and the current interest
rate approximates a market interest rate. Interest income recognized on a
cash-basis for non-accrual loans amounted to $103,000, $171,000, $261,000,
$182,000, and $334,000 for the years ended December 31, 1998, 1997, 1996, 1995,
1994, respectively.
The maturity distribution and interest rate sensitivity of selected loan
categories at December 31, 1998 is presented in the following table.
14
<PAGE> 15
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------
Within 1-5 After
1 Year Years 5 Years Total
------- ------ ------- -------
(Dollars in thousands)
Loan Maturity:
Mortgage loans:
<S> <C> <C> <C> <C>
Construction $15,143 $ - $ - $15,143
Other loans:
Commercial lines of credit 3,193 72 1,765 5,030
Commercial 1,272 3,415 1,411 6,098
------- ------ ------ -------
$19,608 $3,487 $3,176 $26,271
======= ====== ====== =======
Rate Sensitivity:
Floating interest rates $2,472 $3,157 $ 5,629
Fixed interest rates 1,015 19 1,034
------ ------ -------
Total loans $3,487 $3,176 $ 6,663
====== ====== =======
</TABLE>
INVESTMENT SECURITIES
Investment securities, including interest-bearing deposits and restricted
equity securities, consisting primarily of mortgage-backed securities and trust
preferred securities, increased $93.5 million during 1998 as the Bank deployed
funds from deposits and borrowings to leverage its capital position. This
continued the execution of the Bank's strategy begun in 1993 to maximize the
Bank's return on equity by deploying unused funds into investments having
minimal credit risk. Under this strategy, securities purchases are structured to
realize rate spreads between the securities and funding liabilities while
matching the expected maturities of the securities to the funding provided by
repurchase agreements and Federal Home Loan Bank ("FHLB") advances.
These transactions have the effect of lowering certain financial ratios
such as the Tier 1 leverage capital ratio, return on assets, the weighted
average interest rate spread, and the net yield on average interest-earning
assets, because they substantially increase the average asset base used in such
computations. On the other hand, this strategy results in substantial benefits
to pre-tax income and return on average equity.
Mortgage-backed securities are primarily composed of issues guaranteed by
government and quasi-government agencies and high quality private sector
entities. When interest rates decline, mortgage refinancings increase, resulting
in accelerated principal repayments and lower net rate spreads. When rates
increase, prepayments decrease resulting in longer expected average lives. Net
spreads may increase or decrease depending on the repricing characteristics of
the mortgage-backed securities and the related funding liabilities.
At December 31, 1998, the carrying value of the Bank's investment
securities, including interest-bearing deposits and restricted equity
securities, amounted to $398.2 million, representing 42.2% of the Bank's total
assets. At December 31, 1997, and 1996, the Bank's investment securities,
including interest-bearing deposits and restricted equity securities, accounted
for 39.9% and 38.8%, respectively, of the Bank's total assets.
15
<PAGE> 16
The following table sets forth the amortized cost and estimated fair value
for the Company's held to maturity investment securities portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and federal
agency obligations $ 73,844 $ 74,165 $ 44,253 $ 44,439
Mortgage-backed securities 14,408 14,453 - -
Trust preferred securities 93,807 93,007 - -
Corporate debt securities 4,500 4,500 - -
--------- --------- ---------- ----------
Total held to maturity $ 186,559 $ 186,125 $ 44,253 $ 44,439
========= ========= ========== ==========
</TABLE>
The following table sets forth the amortized cost and estimated fair value
for the Company's available for sale investment portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. Government and federal
agency obligations $ - $ - $ 27,919 $ 27,944 $ 2,500 $ 2,415
Mortgage-backed securities 155,880 153,908 202,047 202,352 181,998 180,800
Trust preferred securities 35,620 35,831 14,148 14,352 - -
Corporate debt securities - - 1,000 988 1,000 980
--------- --------- --------- --------- --------- ---------
Total available for sale $ 191,500 $ 189,739 $ 245,114 $ 245,636 $ 185,498 $ 184,195
========= ========= ========= ========= ========= =========
</TABLE>
The following tables set forth as of the dates indicated, the maturities of
investment securities and the weighted-average yields of such securities, which
have been calculated on the cost basis, weighted for the scheduled maturity of
each security:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------
Weighted
Amortized Fair Average
Cost Value Rate
-------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
Mortgage-backed securities:
After 10 years $155,880 $153,908 6.80%
-------- --------
Total mortgage-backed securities 155,880 153,908 6.80%
-------- --------
Trust preferred securities:
After 10 years 35,620 35,831 7.96%
-------- --------
Total trust preferred securities 35,620 35,831 7.96%
-------- --------
Total investments available for sale $191,500 $189,739 7.02%
======== ========
INVESTMENTS HELD TO MATURITY
U.S. Government and federal agency obligations:
After 5 years but within 10 years 1,300 1,300 6.44%
After 10 years $ 72,544 $ 72,865 7.63%
-------- --------
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
Total U.S. Government & federal agency obligations 73,844 74,165 7.63%
-------- --------
Mortgage-backed securities:
After 10 years 14,408 14,453 6.93%
-------- --------
Total mortgage-backed securities 14,408 14,453 6.93%
-------- --------
Trust preferred securities:
After 5 years but within 10 years 839 836 8.20%
After 10 years 92,968 92,171 9.15%
-------- --------
Total trust preferred securities 93,807 93,007 9.14%
-------- --------
Corporate investments:
After 5 years but within 10 years 4,500 4,500 12.50%
-------- --------
Total corporate investments 4,500 4,500 12.50%
-------- --------
Total investments held to maturity $186,559 $186,125 8.45%
======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------
Weighted
Amortized Fair Average
Cost Value Rate
-------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
Mortgage-backed securities:
Less than 1 year $ 2,993 $ 3,003 6.83%
After 1 year but within 5 years 75 72 10.00%
After 5 years but within 10 years 2,676 2,639 8.00%
After 10 years 196,303 196,638 7.17%
-------- --------
Total mortgage-backed securities 202,047 202,352 7.18%
-------- --------
U.S. Government and federal agency obligations:
After 5 but within 10 years 13,537 13,543 7.33%
After 10 years 14,382 14,401 7.39%
-------- --------
Total U.S. government and federal
agency obligations 27,919 27,944 7.36%
-------- --------
Trust preferred securities:
After 10 years 14,148 14,352 9.55%
-------- --------
Total trust preferred securities 14,148 14,352 9.55%
-------- --------
Corporate investments:
After 1 but within 5 years 1,000 988 5.79%
-------- --------
Total corporate investments 1,000 988 5.79%
-------- --------
Total investments available for sale $245,114 $245,636 7.33%
======== ========
INVESTMENTS HELD TO MATURITY
U.S. Government and federal agency obligations:
After 10 years $ 44,253 $ 44,439 8.57%
======== ========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------
Weighted
Amortized Fair Average
Cost Value Rate
-------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
Mortgage-backed securities:
After 5 years but within 10 years $ 18,395 $ 17,724 6.44%
After 10 years 163,603 163,076 6.98%
-------- --------
Total mortgage-backed securities 181,998 180,800 6.92%
-------- --------
U.S. Government and federal agency obligations:
After 1 but within 5 years 2,500 2,415 4.61%
-------- --------
Corporate investments:
After 1 but within 5 years 1,000 980 6.24%
-------- --------
Total investments available for sale $185,498 $184,195 6.89%
======== ========
</TABLE>
The following table sets forth securities from any single issuer, excluding
the U.S. Government or its agencies, for which amortized cost exceeds 10% of
stockholders' equity:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------
Percent of
Amortized Stockholders' Fair
Cost Equity Value
---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
Fund America $17,095 49.31% $17,073
ABN-AMRO Mortgage Acceptance Corporation, Series 1998-5, Class A8 5,459 15.75 5,465
Residential Funding Mortgage Securities I, Series 1998-S6, Class A4 7,773 22.42 7,797
Residential Funding Mortgage Securities I, Series 1998-S19, Class A5 4,997 14.41 5,006
ABN-AMRO Mortgage Acceptance Corporation, Series 1998-4, Class A1 3,845 11.09 3,845
Structured Asset Management Investments, Inc. 4,353 12.56 4,353
TRUST PREFERRED SECURITIES:
BankBoston Capital Trust $ 3,871 11.17% $ 3,740
Wilmington Savings Fund Society Capital Trust 4,500 12.98 4,500
Banker's Trust Institution Capital Trust 4,277 12.34 4,515
Webster Capital Trust 4,969 14.33 4,838
Northfolk Capital Trust 3,787 10.92 3,956
Green Point Capital Trust 4,642 13.39 4,770
Dime Capital Trust 4,852 14.00 4,838
First Bank of Oak Park Capital Trust 4,919 14.19 4,916
Commerce Bank Capital Trust 4,495 12.97 4,365
First Keystone Capital Trust 4,357 12.57 4,360
Coal City Capital Trust 4,510 13.01 4,365
United Commercial Bank Holdings Capital Trust 4,559 13.15 4,590
City Holdings Capital Trust 4,650 13.41 4,568
First Western Capital Trust 5,022 14.49 5,063
Complete Business Solutions, Inc. Community Capital Trust 5,013 14.46 4,939
Sovereign Bancorp Capital Trust 4,928 14.22 4,995
BancFirst Corporation Capital Trust 4,177 12.05 4,116
Amerus Capital Trust 4,228 12.20 4,088
Citicorp Mortgage Securities, Inc. 5,038 6.75 5,050
Hawthorne Financial Corporation 4,500 12.50 4,500
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C>
Union Planters Capital Trust 4,751 13.70 4,815
Riggs Capital Trust 4,846 13.98 4,613
</TABLE>
DEPOSITS
Deposits generated from within the Bank's local market area are the primary
source of funds for the Bank's lending and investment operations. In addition to
savings deposits, NOW, and money market deposits, the Bank offers several
checking account programs to meet the individual needs of its customers.
Substantially all the Bank's deposits are derived from customers who work or
reside in the Bank's market area.
The average daily amount of deposits and the average rate paid on each of
the following deposit categories is summarized below for the years indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ---- --------- ---- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 33,853 N/A $ 34,818 N/A $ 33,542 N/A
NOW 42,436 0.95% 40,007 1.23% 36,828 1.41%
Savings 93,092 2.60 92,336 2.57 89,003 2.70
Money market 34,295 4.12 26,849 3.37 14,880 2.94
Time 198,749 5.53 144,033 5.57 125,422 5.64
---------- --------- ---------
Total $ 402,425 3.79% $ 338,043 3.49% $ 299,675 3.48%
========== ========= =========
</TABLE>
As of December 31, 1998, term certificates of deposit in amounts of
$100,000 or more had the following maturities:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Under 3 months $102,072
3 to 6 months 20,795
6 to 12 months 5,676
Over 12 months 6,299
----------
Total $134,842
</TABLE>
19
<PAGE> 20
BORROWINGS
The following table summarizes the outstanding balances of borrowings for
the years indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
--------------------------------------------
1998 1997 1996
--------- --------- --------
(Dollars in thousands)
FHLB advances:
<S> <C> <C> <C>
Balance at end of year $ 320,000 $ 260,500 $ 89,250
Average balance 295,058 161,399 114,380
Maximum month-end balance 355,250 260,500 134,277
Weighted average rate during the period 5.59% 5.78% 5.63%
Year-end average rate 5.45% 5.75% 5.64%
Securities sold under agreements to repurchase:
Balance at end of year $ 96,900 $ 96,050 $ 34,670
Average balance 104,395 73,734 32,103
Maximum month-end balance 123,400 96,050 44,740
Weighted average rate during the period 5.87% 5.92% 5.36%
Year-end average rate 5.77% 5.90% 5.28%
</TABLE>
EMPLOYEES
At December 31, 1998, the Company had 262 full-time equivalent employees.
Employee benefits include a pension plan, 401(k) Plan, and life, health, travel,
accident and long-term disability insurance, tuition assistance and an Employee
Stock Ownership Plan, which are offered by the Company to all employees who meet
the minimum hours worked requirements. None of the employees of the Company is
represented by a collective bargaining group, and management considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Bank's main office is located in Easton, Massachusetts. In April 1996,
the Company moved its service center to New Bedford from Easton.
All branches provide a broad range of bank services. All Bank locations,
except for the service center and main office, have ATMs. The Bank is a member
of the Cirrus, Cashstream, and NYCE ATM networks, which provide service to its
customers throughout New England and the United States.
The following table sets forth certain information relating to real estate
owned or leased by the Company as of December 31, 1998. The Company believes
that the fair market value exceeds the net book value of its owned real estate.
<TABLE>
<CAPTION>
Net Book Value at Owned/
Location December 31, 1998 Leased
- -------- ----------------- ------
(Dollars in thousands)
<S> <C> <C>
People's Savings Bank of Brockton
Service Center and Branch:
545 Pleasant Street, New Bedford $5,550 Owned
Commercial Loan Office:
1115 West Chestnut Street, Brockton (3) - Leased
Main Office:
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
580 Washington Street, Easton $ 390 Owned
Other Branches:
757 Centre Street, Brockton $ 270 Owned
500 Washington Street, Stoughton 309 Owned
116 Torrey Street, Brockton (1) 146 Leased
200 Westgate Drive, Brockton (2) 41 Leased
33 Weir Street, Taunton 538 Owned
84 Copeland Drive, Mansfield (4) 263 Leased
2206 Acushnet Ave, New Bedford 434 Owned
28 County Road, Mattapoisett 472 Owned
280 Winthrop Street, Taunton (5) 254 Leased
686 Dartmouth Street, South Dartmouth 846 Owned
People's Mortgage Corporation:
580 Washington Street, South Easton, MA (6) $ 33 Leased
206 Andover Street, Andover, MA (7) - Leased
57 River Street, Wellesley, MA (8) 3 Leased
2337 Whitney Avenue, Hamden, CT (9) 28 Leased
545 Pleasant Street, New Bedford (6) - Leased
45 Pond Street, Norwell, MA (10) 8 Leased
24 Bosworth Street, Unit 1, Barrington, RI (11) 4 Leased
3001 East Main Road, Portsmouth, RI (12) 7 Leased
</TABLE>
(1) Lease expires January 1, 2001 with an option to renew for one three
year period.
(2) Tenant-at-will.
(3) Lease expires October 31, 2000.
(4) Lease expires December 31, 2003.
(5) Lease expires October 31, 1999.
(6) People's Mortgage Corporation leases space from the Company as a
tenant-at-will.
(7) Lease expires February 28, 2003.
(8) Lease expires October 30, 2000.
(9) Lease expires November 30, 2001.
(10) Lease expires February 28, 2001.
(11) Lease expires June 30, 2000.
(12) Lease expires July 31, 2001.
The Bank owns other properties, consisting primarily of foreclosed real
estate, through its subsidiaries G.B.L., Inc. PECO, Inc. and Longworth, Inc.
ITEM 3. LEGAL PROCEEDINGS
21
<PAGE> 22
The Company is involved from time to time as a party to legal proceedings
occurring in the ordinary course of its business. The Company believes that none
of these proceedings would, if adversely determined, have a material effect on
the Company's consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since the Company acquired the stock of the Bank on February 8, 1996, the
Common Stock of the Company has been traded in the over-the-counter market on
the Nasdaq National Market under the symbol "PBKB." Prior to that time, the
common stock of the Bank was traded on the Nasdaq National Market. The following
table sets forth the high and low sales prices of the common stock of the
Company as reported on the Nasdaq National Market during the periods indicated.
<TABLE>
<CAPTION>
SALES PRICE
-----------
HIGH LOW
---- ---
1997
----
<S> <C> <C>
First Quarter................................................. $13.125 $10.375
Second Quarter................................................ 15.50 11.50
Third Quarter................................................. 20.75 15.00
Fourth Quarter................................................ 25.25 17.00
1998
----
First Quarter................................................. $26.00 $19.625
Second Quarter................................................ 27.75 23.00
Third Quarter................................................. 24.25 15.00
Fourth Quarter................................................ 21.25 15.875
</TABLE>
On March 11, 1999, the closing sale price of a share of Common Stock of the
Company on the Nasdaq National Market was $20.125.
At February 26, 1999, there were approximately 626 holders of record of the
Common Stock. The number of holders of record does not reflect the number of
persons or entities who or which hold their stock in nominee or "street" name
through various brokerage firms or other entities.
The Company's ability to pay dividends on the Common Stock depends on the
receipt of dividends from the Bank. Although the Company has adopted a policy of
paying regular quarterly dividends on the Common Stock, there can be no
assurance that such dividends will be paid in the future, or if paid, the amount
of any such dividends.
Declarations of dividends by the Board of Directors of the Company will
depend on a number of factors, including capital requirements, regulatory
limitations, the Bank's operating results and financial condition and general
economic conditions. As the principal asset of the Company, the Bank currently
provides the only source of payment of dividends by the Company. Under
Massachusetts law, stock savings banks such as the Bank may pay dividends only
out of "net profits" and only to the extent that such payments will not impair
the Bank's capital stock and surplus account. If, prior to the declaration of a
dividend, the Bank's capital stock and surplus account do not equal at least 10%
of its deposit liabilities, then prior to payment of the dividend the Bank must
transfer from net profits to its surplus account the amount required to make the
surplus account equal to either (i) together with
22
<PAGE> 23
capital stock, 10% of deposit liabilities or, (ii) subject to certain
adjustments, 100% of capital stock. These restrictions on the ability of the
Bank to pay dividends to the Company may restrict the ability of the Company to
pay dividends to the holders of the Common Stock. Although Massachusetts law
does not define what constitutes "net profits," it is generally assumed that the
term includes a bank's undivided profits account (retained earnings) and does
not include its surplus account (additional paid-in capital).
The Company and the Bank are subject to capital ratio requirements
established by the Federal Reserve Board and the FDIC. Under Section 38 of the
Federal Deposit Insurance Act, the Bank would be prohibited from making any
capital distribution, including the payment of dividends, if the Bank would be
undercapitalized following such distribution under the FDIC's prompt corrective
action regulations. In addition to such regulatory limitations on the payment of
dividends, the effect of the payment of dividends on the capital ratios of the
Bank or the Company, as the case may be, may be a factor in the determination by
the Board of Directors to pay such dividends.
In addition, under current law, to the extent that the Bank makes
"non-dividend distributions" to the Company that are considered to have been
made from certain portions of the Bank's bad debt reserve, an amount based on
the amount distributed will be included in the Bank's taxable income.
The most recent quarterly dividend was declared by the Bank on February 8,
1999, totaled $0.19 per share and was paid on March 16, 1999. The Company
declared and paid quarterly dividends of $0.12, $0.13, $0.14, and $0.19 per
share in the first, second, third, and fourth quarters, respectively, of 1998.
The Company declared and paid quarterly dividends of $0.09, $0.11, $0.11, and
$0.11 per share in the first, second, third, and fourth quarters, respectively,
of 1997. The Company declared and paid quarterly dividends of $0.05, $0.07,
$0.07, and $0.08 per share in the first, second, third and fourth quarters,
respectively, of 1996. The dividend payout ratio was 25.2%, 28.2%, 24.3% and
4.2% in 1998, 1997, 1996 and 1995, respectively. There were no dividends paid
out in the years ended December 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears on page 4 of the Annual
Report to Stockholders for the fiscal year ended December 31, 1998 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item appears in the Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 2 to 12 inclusive of the Annual Report to Stockholders for the fiscal year
ended December 31, 1998 and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item appears on pages 9 and 10 of the
Annual Report to Stockholders for the fiscal year ended December 31, 1998 and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Information required by this item appears on pages 13 to 28 inclusive
of the Annual Report to Stockholders for the fiscal year ended December 31, 1998
and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will appear under the headings
"Directors of the Company," "Executive Officers of the Company" and "Compliance
with Section 16(a) of the Exchange Act" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 18, 1999 (the
"Proxy Statement"), to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Proxy Statement
under the headings "Executive Compensation" and "Compensation of Directors" and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. TRANSACTIONS WITH CERTAIN RELATED PERSONS.
The information required by this item will appear in the Proxy Statement
under the heading "Certain Transactions" and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index of Financial Statements. The following financial statements
appear in response to Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Index of Financial Statements Schedules. All financial statement
schedules have been omitted because they are not required, not applicable or are
included in Notes to Consolidated to Financial Statements.
(b) Exhibits.
24
<PAGE> 25
*EXHIBIT DESCRIPTION
-------- -----------
2.1 Plan of Reorganization and Acquisition by and between the Company
and the Bank dated as of March 31, 1995 (filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (No. 33-99772),
(the "S-1") and incorporated herein by reference)
3.1 Restated Articles of Organization of the Company (filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference)
3.2 By-laws of the Company, as amended and restated (filed on exhibit
3.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference)
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization of
the Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
10.1 Amended and Restated Special Termination Agreement by and among
the Company, the Bank and Colin C. Blair, dated as of February 7,
1996+ (filed as Exhibit 10.5 to the S-1 and incorporated herein by
reference)
10.2 Amended and Restated Special Termination Agreement by and between
the Bank and Donna L. Boulanger, dated as of February 7, 1996
(filed as Exhibit 10.6 to the S-1 and incorporated herein by
reference)
10.4 Amended and Restated Special Termination Agreement by and between
the Bank and Lorraine P. Healy, dated as of February 7, 1996
(filed as Exhibit 10.8 to the S-1 and incorporated herein by
reference)
10.6 Amended and Restated Special Termination Agreement by and between
the Bank and Maureen A. Gregory, dated as of February 7, 1996
(filed as Exhibit 10.10 to the S-1 and incorporated herein by
reference)
10.7 Employment Agreement by and between People's Mortgage Corporation
and John J. Kiernan, Jr. dated as of October 6, 1995 (filed as
Exhibit 10.11 to the S-1 and incorporated herein by reference)
10.8 Employment Agreement by and between People's Mortgage Corporation
and James F. Ryder, Jr. dated October 6, 1995 (filed as Exhibit
10.12 to the S-1 and incorporated herein by reference)
10.9 Employment Agreement by and between People's Mortgage Corporation
and Michael C. Gillis dated as of March 31, 1995 (filed as Exhibit
10.13 to the S-1 and incorporated herein by reference)
10.10 Employment Agreement by and between People's Mortgage Corporation
and Vincent E. Hayes, Jr. dated as of March 31, 1995 (filed as
Exhibit 10.14 to the S-1 and incorporated herein by reference)
10.11 Employment Agreement by and between the Bank and Raymond F.
Wheeler dated as of May 10,
25
<PAGE> 26
1995 (filed as Exhibit 10.15 to the S-1 and incorporated herein by
reference)
10.12 Discretionary Bonus Plan of the Bank+ (filed as Exhibit 10.16 to
the S-1 and incorporated herein by reference)
10.13 Amended and Restated Directors' Stock Option Plan+ (filed as
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference)
10.14 Amended and Restated Incentive and Nonqualified Stock Option Plan+
(filed as Exhibit 10.18 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference)
10.15 1996 Stock Option and Incentive Plan+ (filed as Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
10.16 Form of Director Nonqualified Stock Option Agreement (filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference)
10.17 Form of Employee Nonqualified Stock Option Agreement (filed as
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference)
10.18 Form of Incentive Stock Option Agreement (filed as Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
*10.19 Special Termination Agreement by and among the Company, the Bank
and Richard S. Straczynski, dated as of April 7, 1997+. (filed as
exhibit 10.19 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated by refernce).
*13 People's Bancshares, Inc. 1998 Annual Report to Stockholders
*21 Schedule of subsidiaries of the Company
*23 Consent of Wolf & Company, P.C., as independent certified public
accountants
*27 Financial Data Schedule
- ----------
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an exhibit
to this Form 10-K pursuant to Item 14 of Form 10-K.
(c) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized on
March 30, 1999.
PEOPLE'S BANCSHARES, INC.
By: /s/ Richard S. Straczynski
--------------------------------------------
Richard S. Straczynski
President & Chief Executive Officer
By: /s/ Colin C. Blair
--------------------------------------------
Colin C. Blair
Chief Financial Officer
(principal financial and accounting officer)
27
<PAGE> 28
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD S. STRACZYNSKI President & CEO March 30, 1999
- --------------------------
Richard S. Straczynski Director
/s/ COLIN C. BLAIR Chief Financial Officer March 30, 1999
- --------------------------
Colin C. Blair
/s/ FREDERICK W. ADAMI, III Director March 30, 1999
- ---------------------------
Frederick W. Adami, III
/s/ B. BENJAMIN CAVALLO Director March 30, 1999
- --------------------------
B. Benjamin Cavallo
/s/ JOHN R. EATON Director March 30, 1999
- --------------------------
John R. Eaton
/s/ TERRENCE GOMES Director March 30, 1999
- --------------------------
Terrence Gomes
/s/ DR. LORING C. JOHNSON Director March 30, 1999
- --------------------------
Dr. Loring C. Johnson
/s/ RICHARD D. MATTHEWS Director March 30, 1999
- --------------------------
Richard D. Matthews
/s/ SCOTT W. RAMSAY Director March 30, 1999
- --------------------------
Scott W. Ramsay
/s/ DAVIS H. SCUDDER Director March 30, 1999
- --------------------------
Davis H. Scudder
/s/ STANLEY D. SISKIND Director March 30, 1999
- --------------------------
Stanley D. Siskind
28
<PAGE> 29
EXHIBIT INDEX
*EXHIBIT DESCRIPTION
-------- -----------
2.1 Plan of Reorganization and Acquisition by and between the
Company and the Bank dated as of March 31, 1995 (filed as
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (No. 33-99772), (the "S-1") and incorporated herein by
reference)
3.1 Restated Articles of Organization of the Company (filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
3.2 By-laws of the Company, as amended and restated (filed as
exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
Reference)
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization
of the Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
10.1 Amended and Restated Special Termination Agreement by and
among the Company, the Bank and Colin C. Blair, dated as of
February 7, 1996+ (filed as Exhibit 10.5 to the S-1 and
incorporated herein by reference)
10.2 Amended and Restated Special Termination Agreement by and
between the Bank and Donna L. Boulanger, dated as of February
7, 1996 (filed as Exhibit 10.6 to the S-1 and incorporated
herein by reference)
10.3 Amended and Restated Special Termination Agreement by and
between the Bank and Charles R. Leyton, dated as of February
7, 1996 (filed as Exhibit 10.7 to the S-1 and incorporated
herein by reference)
10.4 Amended and Restated Special Termination Agreement by and
between the Bank and Lorraine P. Healy, dated as of February
7, 1996 (filed as Exhibit 10.8 to the S-1 and incorporated
herein by reference)
10.5 Amended and Restated Special Termination Agreement by and
between the Bank and Robert Cully, dated as of February 7,
1996 (filed as Exhibit 10.9 to the S-1 and incorporated herein
by reference)
10.6 Amended and Restated Special Termination Agreement by and
between the Bank and Maureen A. Gregory, dated as of February
7, 1996 (filed as Exhibit 10.10 to the S-1 and incorporated
herein by reference)
10.7 Employment Agreement by and between People's Mortgage
Corporation and John J. Kiernan, Jr. dated as of October 6,
1995 (filed as Exhibit 10.11 to the S-1 and incorporated
herein by reference)
10.8 Employment Agreement by and between People's Mortgage
Corporation and James F. Ryder, Jr. dated October 6, 1995
(filed as Exhibit 10.12 to the S-1 and incorporated herein by
reference)
10.9 Employment Agreement by and between People's Mortgage
Corporation and Michael C. Gillis
<PAGE> 30
dated as of March 31, 1995 (filed as Exhibit 10.13 to the S-1
and incorporated herein by reference)
10.10 Employment Agreement by and between People's Mortgage
Corporation and Vincent E. Hayes, Jr. dated as of March 31,
1995 (filed as Exhibit 10.14 to the S-1 and incorporated
herein by reference)
10.11 Employment Agreement by and between the Bank and Raymond F.
Wheeler dated as of May 10, 1995 (filed as Exhibit 10.15 to
the S-1 and incorporated herein by reference)
10.12 Discretionary Bonus Plan of the Bank+ (filed as Exhibit 10.16
to the S-1 and incorporated herein by reference)
10.13 Amended and Restated Directors' Stock Option Plan+ (filed as
Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
10.14 Amended and Restated Incentive and Nonqualified Stock Option
Plan+ (filed as Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
10.15 1996 Stock Option and Incentive Plan+ (filed as Exhibit 10.21
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
10.16 Form of Director Nonqualified Stock Option Agreement (filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by
reference)
10.17 Form of Employee Nonqualified Stock Option Agreement (filed as
Exhibit 10.23 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by
reference)
10.18 Form of Incentive Stock Option Agreement (filed as Exhibit
10.24 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference)
10.19 Special termination agreement by and among the Company, the
Bank and Richard S. Straczynski, dated as of April 7, 1997+.
(filed as exhibit 10.19 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated by
reference).
*13 People's Bancshares, Inc. 1997 Annual Report to Stockholders
*21 Schedule of subsidiaries of the Company
*23 Consent of Wolf & Company, P.C., as independent certified
public accountants
*27 Financial Data Schedule
- ----------
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an exhibit
to this Form 10-K pursuant to Item 14 of Form 10-K.
(c) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
<PAGE> 1
EXHIBIT 13
TO OUR SHAREHOLDERS
We are pleased to present the 1998 Annual Report for People's Bancshares, Inc.
This year marked a record year of growth and profitability allowing us to
achieve a record 23.33% return on average equity in 1998. Operating results for
1998 were strongly influenced by increased earning assets and the increased
contribution of People's Mortgage Corporation ("PMC") to our profitability. As a
result, net income in 1998 increased 48% to $7.6 million or $2.25 per diluted
share compared to $5.1 million or $1.47 per diluted share in 1997. Annual
dividends per share paid to common shareholders increased from $0.42 in 1997 to
$0.58 in 1998.
Pre-tax income increased by $4.1 million or 51% in 1998. This improvement was a
result of a $4.2 million increase in net interest income and a $2.3 million
increase in gains on loan sales. The increase in net interest income was
primarily attributable to a 40% increase in average earning assets and the
increase in loan sale gains was generated by a 97% increase in mortgage loan
originations at PMC. These increases to income were partially offset by a $2.9
million increase in operating expenses primarily attributable to PMC's growing
operations. People's continued to successfully manage non-performing assets
which represented 0.17% of total assets at December 31, 1998, compared to 0.52%
of total assets at December 31, 1997. Our allowance to non-performing loans
ratio stood at 321% at December 31, 1998 compared to 110% at December 31, 1997.
In addition to these positive financial achievements, I am proud to inform you
that on February 1, 1999, we opened a new full service banking office at 220 Oak
Street in Brockton replacing our former Westgate Mall, Brockton location. We
also opened three PMC branches, two in Rhode Island and one in East Springfield,
MA. These serve to symbolize our enthusiasm toward ongoing growth and commitment
to providing valuable products and exceptional service to our customers.
An issue for all businesses continues to be the "Year 2000" computer challenge,
and it has not been any different at People's. We have been diligent in our
efforts since 1997 to eliminate potential Y2K problems. We have a dedicated,
highly trained team of individuals from across our organization working with
outside professional consultants as well as federal banking regulators to
address Y2K issues. We have also been closely monitoring the progress of third
party software providers to ensure that our support systems continue to provide
our customers with the products and service they have come to expect from
People's. I am confident that we will be prepared for the date change, and our
contingency planning will minimize any unexpected events stemming from outside
sources.
On a sad note, it is with regret that I inform you of the passing of Gerald
Rodman, Director of People's Bancshares since 1994 and a valued member of our
Board. He was Partner and Founder of Rodman Ford Sales and was very well known
for his philanthropy and strong sense of community. His insight and guidance
will be sorely missed.
We would like to take this opportunity to extend our sincere thanks to our
customers and shareholders for their continued support. Finally, I would like to
thank every member of our staff and our Board of Directors for their efforts to
enhance shareholder value during 1998.
Very truly yours,
[Picture of Richard S. Straczynski]
/s/ Richard S. Straczynski
Richard S. Straczynski
President & Chief Executive Officer
1
<PAGE> 2
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
NET YIELD ON AVERAGE EARNING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- -------- ------
<S> <C> <C> <C>
ASSETS
Loans and loans held for sale (1):
Real estate $440,896 $32,532 7.38%
Other loans 40,459 3,845 9.50
-------- -------
Total loans 481,355 36,377 7.56
Short-term investments 5,547 303 5.46
Investment securities (2) 335,552 25,112 7.48
-------- -------
Total interest-earning assets 822,454 61,792 7.51
-------
Allowance for loan losses (4,512)
Other real estate owned, net 93
Other assets 35,518
--------
Total assets $853,553
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW $ 42,436 405 0.95
Savings 93,092 2,423 2.60
Money market 34,295 1,413 4.12
Time 198,749 10,998 5.53
-------- -------
Total interest-bearing deposits 368,572 15,239 4.13
Borrowed funds 413,253 24,002 5.81
-------- -------
Total interest-bearing liabilities 781,825 39,241 5.02
Demand deposits 33,853
Other liabilities 5,235
--------
Total liabilities 820,913
Stockholders' equity 32,640
--------
Total liabilities and stockholders' equity $853,553
========
Net interest income $22,551
=======
Weighted average interest rate spread 2.49%
Net yield on average interest-earning assets 2.74%
</TABLE>
(1) Non-accrual loan balances and interest received on such loans are included
in this table.
(2) Average balances of investment securities are based upon amortized cost.
2
<PAGE> 3
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
- -------- -------- ------
$278,678 $22,100 7.93%
33,553 3,197 9.53
- -------- -------
312,231 25,297 8.10
7,057 374 5.30
267,855 18,829 7.03
- -------- -------
587,143 44,500 7.58
-------
(4,380)
520
31,754
- --------
$615,037
========
$ 40,007 494 1.23
92,336 2,369 2.57
26,849 905 3.37
144,033 8,017 5.57
- -------- -------
303,225 11,785 3.89
242,263 14,400 5.94
- -------- -------
545,488 26,185 4.80
-------
34,818
3,907
- --------
584,213
30,824
- --------
$615,037
========
$18,315
=======
2.78%
3.12%
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
- -------- -------- ------
$210,422 $17,129 8.14%
30,321 2,864 9.45
- -------- -------
240,743 19,993 8.30
2,798 154 5.50
210,962 13,614 6.45
- -------- -------
454,503 33,761 7.43
-------
(4,613)
961
28,183
- --------
$479,034
========
$ 36,828 518 1.41
89,003 2,407 2.70
14,880 437 2.94
125,422 7,073 5.64
- -------- -------
266,133 10,435 3.92
146,483 8,160 5.57
- -------- -------
412,616 18,595 4.51
33,542 -------
5,552
- --------
451,710
27,324
- --------
$479,034
========
$15,166
=======
2.92%
3.34%
3
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 944,640 $ 762,910 $ 496,133 $ 324,440 $ 231,566
Investment securities and interest bearing deposits 378,382 289,889 184,195 160,582 98,489
Restricted equity securities 19,841 14,824 8,322 6,127 5,132
Loans, net 423,778 382,407 246,195 129,778 111,103
Deposits 470,887 355,083 336,238 174,583 134,345
Borrowed funds 416,900 356,550 123,920 126,245 77,580
Subordinated debentures 13,800 13,800 -- -- --
Stockholders' equity 34,667 30,136 31,064 19,677 16,975
CONSOLIDATED OPERATING DATA:
Interest and dividend income $ 61,792 $ 44,500 $ 33,761 $ 19,729 $ 14,293
Interest expense 39,241 26,185 18,595 11,149 6,559
---------- ---------- ---------- ---------- -----------
Net interest income 22,551 18,315 15,166 8,580 7,734
Provision for loan losses 600 100 75 525 807
---------- ---------- ---------- ---------- -----------
Net interest income, after provision for loan losses 21,951 18,215 15,091 8,055 6,927
Other income 9,457 6,197 4,031 1,755 1,033
Operating expenses 19,238 16,347 13,678 6,787 6,226
---------- ---------- ---------- ---------- -----------
Income before income taxes
and cumulative effect of accounting change 12,170 8,065 5,444 3,023 1,734
Provision (benefit) for income taxes 4,370 2,934 1,885 829 (240)
---------- ---------- ---------- ---------- -----------
Income before cumulative effect of accounting change 7,800 5,131 3,559 2,194 1,974
Cumulative effect of accounting change for organization
costs, net of tax (186) -- -- -- --
---------- ---------- ---------- ---------- -----------
Net income $ 7,614 $ 5,131 $ 3,559 $ 2,194 $ 1,974
========== ========== ========== ========== ===========
PER SHARE DATA:
Weighted average shares outstanding assuming dilution 3,384,877 3,500,048 3,267,890 2,523,135 2,338,274
Weighted average shares outstanding 3,310,943 3,446,299 3,196,436 2,313,399 2,300,224
Diluted earnings per share $ 2.25 $ 1.47 $ 1.09 $ 0.87 $ 0.84
Basic earnings per share 2.30 1.49 1.11 0.95 0.86
Cash dividends paid per share 0.58 0.42 0.27 0.04 --
Book value per common share 10.44 9.16 8.72 8.47 7.38
SELECTED FINANCIAL RATIOS:
Return on average assets 0.89% 0.83% 0.74% 0.81% 0.95%
Return on average equity 23.33 16.65 13.03 11.65 11.80
Weighted average interest rate spread 2.49 2.78 2.92 2.94 3.62
Average equity to average assets 3.82 5.01 5.70 6.92 8.09
Allowance for loan losses to non-performing loans 2 320.76 110.20 122.08 79.84 67.76
Allowance for loan losses to total loans 1.14 1.11 1.88 2.85 2.79
Efficiency ratio 1 57.67 63.39 68.10 62.89 60.34
Efficiency ratio of the Company excluding mortgage
banking subsidiary 1 53.20 58.55 60.84 57.33 N/A
</TABLE>
(1) Equals non-interest expense divided by net interest income excluding
provisions for loan losses, OREO expenses, non-recurring expenses, gains
and losses on securities and purchased loan transactions, and interest
expense on subordinated debentures.
(2) Periods prior to 1995 are restated to reflect the adoption of SFAS 114.
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those contemplated by such forward-looking statements. These factors include,
without limitation, those set forth below under the caption "Certain Factors
That May Affect Future Results."
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those contemplated by forward-looking statements made in
this annual report or presented elsewhere by management from time to time. A
number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the Bank's continued ability to
originate loans, fluctuation of interest rates, real estate market conditions in
the Bank's lending areas, general and local economic conditions, the Bank's
continued ability to attract and retain deposits, the Company's ability to
control costs, new accounting pronouncements, changing regulatory requirements
and new tax or other state and national legislation. The following analysis of
the Company's consolidated results of operations and financial condition should
be read in conjunction with the consolidated financial statements and
accompanying notes included in this report.
GENERAL
The Company. People's Bancshares, Inc. (the "Company") is a unitary bank holding
company subject to the Bank Holding Company Act ("BHC"), the principal business
of which consists of the business of People's Savings Bank of Brockton (the
"Bank"). The only significant assets of the Company are the capital stock of the
Bank and the Company's equity interest in People's Bancshares Capital Trust, a
Delaware business trust (the "Trust") formed in 1997. Although the Company is a
legal entity separate from the Bank and the Trust, the Company itself is not
engaged in any business activities. The Trust issued $13.8 million of trust
preferred securities to the public on June 26, 1997 to purchase subordinated
debentures from the Company. The Bank. The Bank was chartered as a Massachusetts
mutual savings bank on February 6, 1895. On October 30, 1986, the Bank converted
to a Massachusetts chartered savings bank in stock form. The Bank is engaged
principally in the business of attracting deposits from individuals, businesses
and governments, and investing those funds in residential and commercial
mortgages, consumer, commercial and construction loans and investments,
consisting primarily of mortgage-backed securities and trust preferred
securities. The Bank originates loans for investment with the exception of
residential mortgage loans. The Bank and its mortgage banking subsidiary,
People's Mortgage Corporation ("PMC"), originate 1-4 family residential loans
primarily for sale in the secondary market, generally with the servicing rights
of such loans. The Company sold 97%, 92% and 93% of its 1-4 family residential
loan originations in 1998, 1997, and 1996, respectively. Loan sales are made
from loans originated by PMC, on which PMC has obtained purchase commitments
from investors prior to funding. The Bank actively manages the purchase and
sales of investments and loans which are serviced by third parties. These
purchases are funded by FHLB advances, repurchase agreements and municipal
deposits. Such leveraged assets amounted to $558.5 million and $414.0 million at
December 31, 1998 and 1997, respectively. The Bank's revenues are derived
principally from interest on its loans, interest and dividends on its investment
securities, customer fees, and gains on residential mortgage loan sales. The
Bank's primary sources of funds are customer deposits, amortization and
repayment of loan and investment principal, interest and dividends on loans and
investments, maturity or sale of investment securities, collateralized
borrowings and proceeds from the sale of loans. The Bank offers a variety of
deposit accounts, including NOW accounts, regular savings accounts, money market
accounts, fixed rate certificates of deposits and various retirement accounts.
The Bank has eight wholly-owned subsidiaries. PMC, which was organized in March
1995, acts as the mortgage banking subsidiary of the Bank. PSB Security
Corporation I, II, and III, organized in February 1996, are "security
corporations" for Massachusetts state income tax purposes, and are subject to a
more favorable tax rate on income derived from securities held in them. PSB
Security Corporation I was active until December 31, 1998 and PSB Security
Corporations II & III were activated in January 1999. The remaining subsidiaries
of the Bank are primarily engaged in the management and sale of foreclosed real
estate.
OVERVIEW
Operating results were influenced by the Company's write-off of $920,000 of
goodwill and organization costs in 1998; the issuance of trust preferred
securities through the Trust, and a 10% common stock repurchase in 1997; and the
acquisition of five branches in 1996. From 1996 to 1998, earning assets have
increased significantly and there has been continued growth in residential
mortgage loan originations generated by PMC. Average earning assets increased
81% from $454.5 million in 1996 to $822.5 million in 1998. Mortgage loan
originations increased 200% from $229.4 million in 1996 to $688.9 million in
1998. It is within this context of rapid change and growth that the Company's
operating results should be analyzed. Net income amounted to $7.6 million or
$2.25 per diluted share for the year ended December 31, 1998, compared to $5.1
million or $1.47 per diluted share for the year ended December 31, 1997 and $3.6
million or $1.09 per diluted share for December 31, 1996. Basic earnings per
share was $2.30 for the year ended December 31, 1998 compared to $1.49 and $1.11
for the years ended December 31, 1997 and 1996, respectively. Income before
income taxes increased to $12.2 million for the year ended December 31, 1998
from $8.1 million for the year ended December 31, 1997 and $5.4 million for the
year ended December 31, 1996. Tax expense amounted to $4.3 million for the year
ended December 31, 1998 compared to tax expense of $2.9 million and $1.9 million
for the years ended December 31, 1997 and 1996, respectively.
The improvement in pre-tax income for 1998 was due to an increase of $4.2
million or 23% in net interest income, and a $3.3 million or 53% increase in
other income, offset by a $2.9 million increase in operating expenses. The
improvement for 1997 was due to an increase of $3.1 million or 21% in net
interest income and a $2.2 million or 54% increase in other income offset by a
$2.7 million increase in operating expenses.
5
<PAGE> 6
The 1998 increase in net interest income was primarily attributable to a
substantial increase in average earning assets which accounted for 103% of the
increase in the net interest margin. The positive contributions to the net
interest margin of increased interest rates earned on average investments and
decreased rates paid on average borrowings was not sufficient to offset the
negative effects of decreased yields earned on average loans and increased rates
paid on average deposit funds. Net interest margins were adversely effected by
the amortization of premiums associated with purchased loans, mortgage-backed
securities and loans acquired in branch acquisitions due to increased
prepayments of 1-4 family residential loans. The adverse effect of amortization
of such premiums on diluted earnings per share was as follows for 1998, 1997,
and 1996:
1998 1997 1996
---------------------------
First quarter $0.19 $0.02 $0.05
Second quarter 0.20 0.03 0.08
Third quarter 0.09 0.04 0.02
Fourth quarter 0.09 0.09 0.01
----- ----- -----
$0.57 $0.18 $0.16
===== ===== =====
The total premiums on purchased 1-4 family residential loans, mortgage-backed
securities, and loans acquired in branch acquisitions amounted to $10.1 million
and $8.0 million at December 31, 1998 and 1997, respectively.
The 1998 increase in other income was due to a $2.3 million increase in gains on
sales of loans, and a $1.2 million increase in gains on sales of securities. The
increase in gains on loan sales was the result of residential mortgage
originations increasing 97% during 1998. This is attributable to the continued
growth of the Bank's mortgage banking subsidiary as well as a residential
mortgage refinancing boom. PMC's results of operations are volatile and highly
influenced by the interest rate environment. Generally, PMC will be more
profitable during periods of low or declining interest rates. During 1998, 1997,
and 1996 PMC has made the following contributions (charges) to diluted earnings
per share.
1998 1997 1996
---------------------------
First quarter $0.11 $0.04 $(0.01)
Second quarter 0.09 0.01 0.01
Third quarter 0.14 0.07 (0.04)
Fourth quarter 0.17 0.05 --
----- ----- ------
$0.51 $0.17 $(0.04)
===== ===== ======
Operating expense other than OREO expense increased $3.2 million in 1998
primarily due to a $1.8 million increase in salaries and benefits expense, and a
$1.2 million increase in other general and administrative expense. These
increases were primarily attributable to the growing operations of the Bank's
mortgage banking subsidiary. At December 31, 1998, PMC had 107 employees
compared to 75 and 68 at December 31, 1997 and 1996, respectively. Also, the
Company wrote-off $475,000 in impaired goodwill associated with an
underperforming branch and expensed 1998 start-up costs of PMC branches of
$153,000 that was capitalizable under prior accounting treatment.
Assets at December 31, 1998 totaled $944.6 million compared to $762.9 million at
December 31, 1997. The increase in total assets of $181.7 million or 24% is
largely attributable to the Bank's continued use of borrowed funds and municipal
deposits to generate additional interest income by investing the proceeds in
mortgage-backed and trust preferred securities and purchasing 1-4 family
residential loans. During 1998, the Bank purchased $174.7 million of 1-4 family
residential loans that are serviced by third parties.
The allowance for loan losses at December 31, 1998, totaled $4.9 million or
1.14% of total loans compared to $4.3 million or 1.11% at year-end 1997. The
allowance for loan losses as a percentage of non-performing loans amounted to
321% at December 31, 1998, compared to 110% at December 31, 1997. Non-performing
assets decreased to $1.6 million or 0.17% of total assets at December 31, 1998,
compared to $4.0 million or 0.52% of total assets at December 31, 1997. The
Bank's book value per share at December 31, 1998 amounted to $10.44 per share
compared to $9.16 per share at December 31, 1997. The Company announced a second
stock repurchase plan on September 1, 1998 allowing the repurchase of up to 10%
of its currently outstanding common stock over an eighteen month period.
No stock has been repurchased under this plan as of December 31, 1998.
GOVERNMENT REGULATION
The Company has been incorporated as a business corporation under Massachusetts
law. Thus, the Company is subject to regulation by the Secretary of the
Commonwealth of Massachusetts and the rights of its stockholders are governed by
Massachusetts corporate law. As a bank holding company, the Company is subject
to regulation and supervision by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") pursuant to the BHC Act. As a state
chartered savings bank whose deposits are insured by the FDIC, the Bank is
subject to regulation by federal and state regulatory authorities including, but
not limited to, the FDIC and the Commissioner of Banks of Massachusetts (the
"Commissioner").
In granting approval of the reorganization in which the Bank became a
wholly-owned subsidiary of the Company, the Commissioner included a provision
which requires the Bank and the Company to maintain Tier 1 leverage capital
ratio of at least 4.00%, which is equivalent to the minimum Tier 1 leverage
capital ratios of the FDIC and Federal Reserve Board. The Commissioner has
indicated to the Bank that this minimum capital requirement is not related to
the Bank's financial condition, but instead reflects the policy of the
Commissioner to impose minimum capital requirements with respect to all one-bank
holding company formations. The approval also provides that if the Bank's Tier 1
leverage capital ratio is below 4.00%, the Bank must seek Commissioner approval
before paying dividends to the Company. The Bank's Tier 1 leverage capital ratio
was 5.18% as of December 31, 1998.
FINANCIAL CONDITION
Cash and cash equivalents increased $5.1 million during 1998.
Investment securities, including interest-bearing deposits and restricted equity
securities, consisting primarily of mortgage-backed and trust preferred
securities, increased $93.5 million during 1998 as the Bank deployed borrowed
and deposit funds to leverage its capital position. This continued the execution
of the Bank's strategy begun in 1993 to maximize the Bank's return on equity by
deploying wholesale funding into investments having minimal credit risk. Under
this strategy, investment securities and residential real estate loan purchases
are structured to realize rate spreads between the investments and loans and
funding liabilities while matching the expected maturities of the securities and
loans to the funding provided by repurchase agreements and FHLB advances.
These transactions had the effect of lowering certain financial ratios such as
the Tier 1 leverage capital ratio, return on average assets, the weighted
average interest rate spread, and the net yield on average interest-earning
assets, because they substantially increase the average asset base used in such
computations. On the other hand, this strategy resulted in substantial benefits
to pre-tax income and return on equity.
6
<PAGE> 7
When interest rates decline, mortgage refinancings increase, which results in
accelerated principal repayments and purchase premium write-offs. When interest
rates increase, prepayments decrease, which results in longer expected average
lives. Net spreads may increase or decrease depending on the repricing
characteristics of the investments and the related funding liabilities.
Loans and loans held for sale increased $81.1 million, or 20%, to $492.6 million
at December 31, 1998, from $411.4 million at December 31, 1997. Contributing to
this increase was the purchase of $174.7 million of residential real estate
loans. People's Mortgage Corporation increased the Bank's 1-4 family residential
loans originations to $688.9 million for 1998 compared to $349.7 million for
1997. These loans were mostly sold to investors resulting in net gains of $6.5
million for 1998 compared to $4.1 million for 1997.
The allowance for loan losses was $4.9 million, or 1.14% of total loans at
December 31, 1998, compared to $4.3 million, or 1.11% of total loans at December
31, 1997. The allowance for loan losses amounted to 321% of non-performing loans
at December 31, 1998, compared to 110% of non-performing loans at December 31,
1997. Non-performing loans totaled $1.5 million and $3.9 million at December 31,
1998 and 1997, respectively. Foreclosed real estate amounted to $105,000 at
December 31, 1998, compared to $111,000 at December 31, 1997.
Deposits increased $115.8 million during 1998 primarily a result of the growth
of municipal deposit products which increased from $57.4 million at December 31,
1997 to $141.6 million at December 31, 1998. Non-certificate accounts, excluding
municipal non-certificate deposits, increased from $179.8 million at December
31, 1997 to $193.4 million at December 31, 1998. Borrowed funds increased $60.4
million during 1998 to fund the purchase of mortgage loans, mortgage-backed
securities, and trust preferred securities.
At December 31, 1998, there were $1.1 million in net unrealized losses, after
tax effects, on investment securities available for sale compared to $332,000 in
net unrealized gains, after tax effects, at December 31, 1997. Without these net
unrealized gains and losses, book value per share would have been $10.78 at
December 31, 1998, and $9.06 at December 31, 1997.
RESULTS OF OPERATIONS
Net interest income increased to $22.6 million in 1998, from $18.3 million in
1997, and $15.2 million in 1996.
Interest and dividend income amounted to $61.8 million in 1998, compared to
$44.5 million in 1997, and $33.8 million in 1996. The increases in interest and
dividend income in 1998 and 1997 were due to $235.3 million and $132.6 million
increases in average interest-earning assets, respectively. The increases in
average assets were primarily due to the deployment of borrowed and deposit
funds into purchased mortgage loans, mortgage-backed securities and trust
preferred securities and the impact of branch acquisitions in 1996.
Interest and fees on loans increased to $36.4 million in 1998, from $25.3
million in 1997, and $20.0 million in 1996, primarily as a result of a higher
volume of average loans outstanding. The yield on average loans was adversely
affected as a result of falling interest rates and the resulting effect of
prepayments on purchased and acquired loans' premiums.
Interest and dividends from investment securities increased to $25.1 million in
1998, from $18.8 million in 1997, and $13.6 million in 1996. The increases in
1998, 1997, and 1996 were due to an increase in funds invested in investment
securities and increasing yields on average investments. The yield earned
increased despite falling mortgage loan interest rates due to the investment in
higher yielding agency and trust preferred securities in 1998 and 1997. Interest
on short-term investments amounted to $303,000 in 1998, $374,000 in 1997, and
$154,000 in 1996.
Interest expense amounted to $39.2 million in 1998, $26.2 million in 1997, and
$18.6 million in 1996. The Bank's average cost of funds was 5.02% in 1998,
compared to 4.80% in 1997, and 4.51% in 1996. Interest on deposits increased to
$15.2 million for 1998, from $11.8 million for 1997, and $10.4 million for 1996.
The increase in deposit interest expense in 1998 was due to a $65.3 million
increase in average interest-bearing deposits and a 24 basis point increase in
deposit yield paid compared to 1997. Deposit interest expense increased by $1.4
million in 1997 compared to 1996. The 1997 increase was attributable to the
$37.1 million increase in average interest-bearing deposits offset by a 3 basis
point decrease in deposit yield paid compared to 1996. The increase in average
balances and yields in 1998 reflect the continued expansion of municipal deposit
products.
Interest on borrowed funds increased to $24.0 million for 1998, from $14.4
million for 1997, and $8.2 million in 1996. The increase in interest expense on
borrowed funds for 1998 was due to a $171.0 million increase in average borrowed
funds offset by a 13 basis point decrease in yield paid on borrowed funds
compared to the same period in 1997. As mentioned above, the Bank has leveraged
its capital by borrowing funds and investing in mortgage-backed and trust
preferred securities and purchasing residential real estate loans. Interest
expense on borrowed funds increased $6.2 million in 1997 over 1996 as the Bank
increased average borrowed funds by $95.8 million and increased average rates
paid by 37 basis points.
The following sets forth changes in income and expense attributable to changes
in interest rates and changes in the volumes of interest-earning assets and
interest-bearing liabilities. The change attributable to both volume and rate
has been allocated proportionately to the change due to volume and the change
due to rate.
7
<PAGE> 8
RATE-VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) INCREASE (DECREASE)
---------------------------- -------------------------
VARIANCE VARIANCE
DUE TO DUE TO
TOTAL ------------------ TOTAL ----------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM INTEREST-EARNING ASSETS
Loans and loans held for sale
Real estate $ 10,432 $ 12,065 $ (1,633) $ 4,971 $ 5,423 $ (452)
Other 648 656 (8) 333 308 25
-------- -------- -------- ------- ------- ------
Total loans 11,080 12,721 (1,641) 5,304 5,731 (427)
Short-term investments (71) (82) 11 220 226 (6)
Investment securrities 6,283 5,004 1,279 5,215 3,918 1,297
-------- -------- -------- ------- ------- ------
Total interest and dividend income 17,292 17,643 (351) 10,739 9,875 864
-------- -------- -------- ------- ------- ------
EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits
NOW (89) 29 (118) (24) 42 (66)
Savings 54 20 34 (38) 88 (126)
Money market 508 282 226 468 395 73
Time 2,981 3,027 (46) 944 1,037 (93)
-------- -------- -------- ------- ------- ------
Total interest on deposits 3,454 3,358 96 1,350 1,562 (212)
-------- -------- -------- ------- ------- ------
Borrowed funds 9,602 9,938 (336) 6,240 5,660 580
-------- -------- -------- ------- ------- ------
Total interest expense 13,056 13,296 (240) 7,590 7,222 368
-------- -------- -------- ------- ------- ------
Net interest income $ 4,236 $ 4,347 $ (111) $ 3,149 $ 2,653 $ 496
======== ======== ======== ======= ======= ======
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge to earnings necessary to
maintain the allowance for loan losses at a level adequate to absorb estimated
losses in the loan portfolio. If the economy or real estate values in the Bank's
market decline, additional provisions could be necessary.
The provision for loan losses was $600,000 in 1998, $100,000 in 1997, and
$75,000 in 1996. These provisions were the result of the Bank's internal loan
review, historical loss experience, trends in delinquent and non-accrual loans,
known and inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, collateral values,
an estimate of potential loss exposure on significant credits, concentrations of
credit, and economic conditions based on facts then known.
OTHER INCOME
The Bank's other income totaled $9.5 million in 1998, $6.2 million in 1997, and
$4.0 million in 1996. Customer service fees amounted to $1.4 million in 1998,
$1.5 million in 1997, and $1.6 million in 1996. Gains on sales of loans
increased to $6.5 million in 1998, from $4.1 million in 1997, and $2.1 million
in 1996. The increase in 1998 and 1997 is attributable to the increasing volume
generated by the Bank's mortgage banking subsidiary.
In 1998, the Bank sold investments for net gains of $1.4 million, compared to
net gains of $261,000 in 1997, and net losses of $19,000 in 1996.
OPERATING EXPENSES
Operating expenses totaled $19.2 million in 1998, $16.3 million in 1997, and
$13.7 million in 1996. The Company's efficiency ratio (non-interest expense
divided by net interest income excluding provisions for loan losses, OREO
expenses, non-recurring expenses, gains and losses on securities and purchased
loan transactions, and interest expense on subordinated debentures) was 57.7%,
63.4%, and 68.1% for 1998, 1997, and 1996, respectively. The steady decrease is
attributable to the improved profitability of PMC.
Salaries and benefits expense amounted to $10.5 million in 1998, $8.7 million in
1997, and $7.6 million in 1996. The 1998 and 1997 increases were primarily
attributable to the growth of PMC and the significant increase in mortgage
origination volume. Occupancy and equipment expenses amounted to $2.2 million in
1998, $1.9 million in 1997, and $1.5 million in 1996. The increases were
primarily due to the operations of six new PMC offices opened from 1996 to 1998.
Data processing fees increased to $1.3 million in 1998, compared to $1.2 million
in 1997, and $950,000 in 1996. The 1997 increase was attributable to the 1996
branch acquisitions and the Bank's outsourcing of item processing. Professional
fees amounted to $734,000 in 1998, $858,000 in 1997, and $614,000 in 1996. The
Bank uses outside professionals for various services, including attorneys,
accountants, shareholder services, and appraisers. Legal fees were $185,000 in
1998, $264,000 in 1997, and $206,000 in 1996. Other professional fees amounted
to $549,000, $594,000, and $408,000 for 1998, 1997, and 1996, respectively. The
Bank recognized OREO income totaling $29,000 in 1998, and net OREO expenses
totaling $245,000 in 1997, and $59,000 in 1996. OREO operating expenses such as
property taxes, insurance, maintenance, and repairs, totaled $42,000, $246,000,
and $204,000 for 1998, 1997, and 1996, respectively. The Bank recognized net
gains on sales of OREO, after write-downs, of $71,000, $1,000, and $145,000 in
1998, 1997, and 1996, respectively.
8
<PAGE> 9
The Bank recognized OREO income totaling $29,000 in 1998, and net OREO expense
totaling $245,000 in 1997, and $59,000 in 1996. OREO operating expenses such as
property taxes, insurance, maintenance, and repairs, totaled $42,000, $246,000,
and $204,000 for 1998, 1997, and 1996, respectively. The Bank recognized net
gains on sales of OREO, after write-downs, of $71,000, $1,000, and $145,000 in
1998, 1997, and 1996, respectively.
Other general and administrative expenses amounted to $4.6 million in 1998, $3.5
million in 1997, and $2.9 million in 1996. Amortization of intangible assets
amounted to $113,000 in 1998 compared to $235,000 in 1997, and $249,000 in 1996.
Impaired goodwill of $475,000 related to an underperforming branch was written
off in 1998 and 1998 organizational costs of $153,000 were expensed in
accordance with new accounting treatment. The Bank's advertising expense was
$729,000 in 1998, $577,000 in 1997, and $717,000 in 1996. The 1998 increase
reflects new marketing initiatives for new and existing deposit and loan
products. The 1996 expense reflected added costs of breaking into new markets
acquired as a result of the branch acquisitions. Insurance expense amounted to
$89,000 in 1998, $99,000 in 1997, and $103,000 in 1996. Finally various other
categories of other operating expenses increased to $3.1 million during 1998,
compared to $2.5 million, and $1.8 million in 1997 and 1996, respectively, due
to the Company's increase in size, non-recurring charges in 1997 associated with
branch closings, and the growing operations of PMC.
Income Taxes
The Company recorded income tax expense of $4.4 million in 1998, compared to
$2.9 million and $1.9 million for 1997 and 1996, respectively.
In prior years, the Bank had significant available income tax benefits, which
were not expected to be realized because of the Bank's then significant
operating losses, as well as general economic conditions that existed in its
market area. As a result of its subsequent return to operating profitability,
reduction in non-performing assets, strengthened financial condition, and
expectation of future taxable income, the Bank recognized $136,000 of these
income tax benefits against future income expected to be earned prior to the
expiration date of such tax benefits during 1996. In 1997 and 1998, the Bank
recognized an additional $45,000 and $57,000, respectively, as a result of
generating income qualifying for capital gain treatment.
Cash Flows
Cash flows from operating activities during 1998, 1997 and 1996 have primarily
been affected by net income after adjustment for noncash items that are
principally: (1) the level of provisions for loan losses, (2) net gains (losses)
on sales of securities, (3) depreciation and amortization, (4) loans originated
for sale and subsequently sold, and (5) the effects of deferred tax provisions
and benefits. Operating activities resulted in cash outflows of $33.3 million in
1998, cash inflows of $7.6 million in 1997 and cash outflows of $14.0 million in
1996.
The Bank's deployment of cash flows, provided by increased deposits in 1998,
1997, and 1996, and borrowed funds in 1998, 1997, and 1996, and the issuance of
subordinated debentures in 1997 into investment securities, primarily
mortgage-backed and trust preferred securities, and mortgage loans were the
primary reasons for the Bank's positive cash flows from financing activities and
negative cash flows from investing activities. This corresponds with the Bank's
strategy of using borrowed funds to leverage its capital profitably.
The Bank deployed cash flows into investment purchases, net of proceeds from
investment sales, maturities, and amortization, of $89.2 million, $109.2
million, and $25.8 million for the years ended December 31, 1998, 1997, and
1996, respectively. The Bank also deployed cash flows into loan purchases and
originations, net of amortization and payoffs of $53.9 million, $138.0 million,
and $2.2 million for the years ended December 31, 1998, 1997, and 1996,
respectively. This largely explains the Bank's net cash flows used in investing
activities of $136.4 million, $246.6 million, and $7.7 million for the years
ended December 31, 1998, 1997, and 1996, respectively.
The Bank funded the investment and loan purchases through increases in deposits
of $115.8 million, $18.8 million, and $17.0 million in 1998, 1997, and 1996,
respectively, and borrowed funds, net of repayments amounting to $60.3 million,
$232.6 million, and $48.7 million in 1998, 1997, and 1996, respectively. This
largely explains the Bank's net cash flows provided by financing activities of
$174.8 million, $257.2 million, and $22.9 million for the years ended December
31, 1998, 1997, and 1996, respectively.
During 1998, 1997, and 1996, the Bank experienced net cash inflows from deposits
of $115.8 million, $18.8 million, and $17.0 million, respectively. The increase
is primarily the result of municipal deposit products.
Asset/Liability Management
The earnings of most banking institutions are influenced by interest rate
fluctuations because their balance sheets, both assets and liabilities, are
predominantly interest-bearing. The objective of the Bank's asset/liability
management is to prudently minimize the interest rate risk of its assets and
liabilities. Nonetheless, the Bank, by its very nature, will always be in the
business of taking on interest rate risk. It is the responsibility of the Bank's
Investment Committee, under the authority of the Board of Directors, to oversee
the Bank's management of interest rate risk.
One of the tools used by management to monitor interest rate sensitivity is gap
analysis. Gap analysis involves comparing the difference or "gap" between
interest-earning assets and interest-bearing liabilities that mature or reprice
during a specific period of time. These differences are a primary component of
the risk to net interest income. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitivity
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, therefore, a negative gap
theoretically would tend to adversely affect net income. Conversely, during a
period of falling interest rates, a negative gap position theoretically would
tend to result in an increase in net interest income. In addition, the Bank
analyzes the cumulative amount of the excess or deficiency of rate-sensitive
assets over rate-sensitive liabilities during a specified period of time. At
December 31, 1998, the cumulative one-year gap was a positive $81.7 million or
8.64% of total assets.
Market risk sensitive instruments are generally defined as on and off balance
sheet derivatives and other financial instruments. The following table shows the
Bank's financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity, for the intervals indicated and the
instruments' fair values at December 31, 1998. Mortgage-backed securities are
allocated based upon expected maturities. Adjustable rate loans tied to prime
and adjustable rate mortgage products tied to one and three year U.S. Treasury
Notes are included in the table based on their next repricing date. Of the
products tied to U.S. Treasury Notes there are caps for life time and period
adjustments of 6% and 2%, respectively. There are no prepayment assumptions
included in this schedule. NOW, savings, and money market deposit accounts are
allocated with FDIC guidelines for interest rate risk management. Based upon
current management expectations, borrowings are allocated on their call dates,
or if callable in 1999, the maturity date is used.
9
<PAGE> 10
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------
ONE YEAR 1-2 2-3 3-4 4-5 OVER 5 FAIR
OR LESS YEARS YEARS YEARS YEARS YEARS TOTAL VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS:
Short-term investments $ 16,016 $ -- $ -- $ -- $ -- $ -- $ 16,016 $ 16,016
Average interest rate 4.84% -- -- -- -- -- 4.84%
Interest bearing deposits 2,084 -- -- -- -- -- 2,084 2,084
Average interest rate 5.26% -- -- -- -- -- 5.26%
Investment securities 157,861 33,686 7,305 17,012 8,960 151,519 376,298 375,864
Average interest rate 7.76% 7.29% 7.32% 9.30% 7.95% 8.52% 8.09%
Adjustable-rate loans 125,655 54,015 12,765 30,169 30,169 35,514 288,287 282,264
Average interest rate 7.75% 7.01% 7.40% 7.39% 7.39% 6.77% 7.40%
Fixed-rate loans 67,005 3,506 6,552 8,001 8,000 111,212 204,276 205,828
Average interest rate 6.99% 8.41% 8.77% 8.44% 8.52% 7.58% 7.64%
--------- -------- -------- -------- -------- --------- --------- ---------
Total $ 368,576 $ 91,207 $ 26,622 $ 55,182 $ 47,129 $ 298,245 $ 886,961 $ 879,972
========= ======== ======== ======== ======== ========= ========= =========
INTEREST SENSITIVE LIABILITIES:
NOW $ 9,781 $ 4,892 $ 4,892 $ 4,892 $ 4,892 $ 19,566 $ 48,915 $ 48,915
Average interest rate .80% .80% .80% .80% .80% .80% .80%
Savings 19,165 9,583 9,583 9,583 9,583 38,332 95,829 95,829
Average interest rate 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Money market 28,284 4,714 4,714 -- -- -- 37,712 37,712
Average interest rate 2.25% 2.25% 2.25% -- -- -- 2.25%
Term deposits 218,986 17,762 4,683 2,638 1,520 140 245,729 246,540
Average interest rate 5.14% 5.67% 5.76% 5.99% 5.78% 6.72% 5.21%
Borrowed funds 10,700 101,200 65,500 89,000 26,000 124,500 416,900 423,763
Average interest rate 5.78% 5.91% 5.51% 5.61% 5.49% 5.14% 5.53%
Subordinated debentures -- -- -- -- -- 13,800 13,800 14,145
Average interest rate -- -- -- -- -- 9.76% 9.76% --
--------- --------- -------- --------- -------- --------- --------- ---------
Total $ 286,916 $ 138,151 $ 89,372 $ 106,113 $ 41,995 $ 196,338 $ 858,885 $ 866,904
========= ========= ======== ========= ======== ========= ========= =========
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to make scheduled payments on their adjustable-rate loans may decrease in the
event of an interest rate increase.
The Bank further enhances this analysis by using a computer based
asset/liability management simulation model. This model measures changes in net
interest income by projecting the future composition of the Bank's
interest-earning assets and interest- bearing liabilities and assessing the
effect of rising, flat, and declining interest rate scenarios within a two year
horizon. The simulation model allows the Bank to measure the effects of changing
interest rate environments on net interest margins, net income, capital, and
liquidity. In response to such analysis, the Bank seeks to adjust its assets and
liabilities to diminish the future possible adverse effects of extreme changes
in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Bank to have sufficient cash reserves and cash
equivalents to meet current and future loan commitments and reasonable deposit
withdrawals. Management monitors its liquidity requirements so as to meet
reasonable funding needs. The Bank's principal sources of liquidity are customer
deposits, amortization and repayment of loan principal, interest and dividends
on loans and investments, maturity or sale of investment securities, and
collateralized borrowings from the Federal Home Loan Bank and proceeds from the
sale of loans. In addition to the aforementioned sources of funds, the Bank, as
a member of the Depositors Insurance Fund, has the ability to borrow from the
Fund for short-term cash needs by pledging certain assets.
The Company and the Bank are required to meet certain minimum regulatory capital
requirements. Banks that are highly rated must maintain a minimum leverage ratio
of Tier 1 (or core) capital to total assets of at least 3.00%. All other banks
must maintain a minimum leverage ratio that is at least 4.00%. Banks are also
required to maintain minimum risk-based capital ratios of Tier 1 and qualifying
total capital to risk-weighted assets of 4.00% and 8.00%, respectively.
Tier 1 capital or core capital consists of common stockholders' equity,
non-cumulative perpetual preferred stock and minority interest in consolidated
subsidiaries, minus intangible assets and excludes unrealized gains or losses on
debt securities available for sale. Federal banking regulators limit the
inclusion in Tier 1 capital of deferred tax
10
<PAGE> 11
benefits whose recognition is dependent on future taxable income to the lesser
of 10% of core capital or to the amount that could be realized within one year.
Subordinated debt may also be included in regulatory Tier 1 capital subject to a
limitation that such amounts not exceed 25% of Tier 1 capital.
The Company had a Tier 1 leverage ratio of 5.05%, a risk-weighted Tier 1 ratio
of 8.94%, and a total risk-based capital ratio of 10.22% at December 31, 1998.
The Company had a Tier 1 leverage ratio of 5.25%, a risk-weighted Tier 1 ratio
of 9.27%, and a total risk-based capital ratio of 11.23% at December 31, 1997.
The Bank had a Tier 1 leverage ratio of 5.18%, a risk-weighted Tier 1 ratio of
9.15%, and a total risk-based capital ratio of 10.07% at December 31, 1998. The
Bank had a Tier 1 leverage ratio of 5.26%, a risk-weighted Tier 1 ratio of
9.38%, and a total risk-based capital ratio of 10.43% at December 31, 1997.
NON-PERFORMING ASSETS
The Bank considers loans to be non-performing when doubt exists as to the
ultimate collection of interest or principal. Such loans are placed on
non-accrual status and related accrued interest is charged off against current
period interest income. In addition, the Bank considers certain restructured
loans to be non-performing until the borrower demonstrates a sustained payment
performance, usually for a minimum of six months.
The following table sets forth the Bank's non-performing assets at December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
Mortgage loans $ 1,383 $ 3,832 $ 3,816
Commercial loans 121 59 45
Consumer loans 13 3 2
------- ------- -------
1,517 3,894 3,863
Other real estate owned, net 105 111 493
------- ------- -------
Non-performing assets $ 1,622 $ 4,005 $ 4,356
======= ======= =======
</TABLE>
At December 31, 1998, there were no individual non-performing
assets with a balance greater than $1.0 million.
Non-accrual and impaired loans amounted to $1.5 million, $3.9 million and $3.9
million at December 31, 1998, 1997, and 1996, respectively. The average
investment in impaired loans amounted to $2.7 million, $3.8 million and $4.8
million for the years ended December 31, 1998, 1997, and 1996, respectively.
Interest income recognized on a cash basis on impaired loans amounted to
$103,000, $171,000, and $261,000 for the years ended December 31, 1998, 1997,
and 1996, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been established to absorb estimated losses
inherent in the loan portfolio. The provision to and the level of the allowance
are evaluated on a periodic basis by management and the Board of Directors. The
provision is the result of the Bank's internal loan review, historical loan loss
experience, trends in delinquent and non-accrual loans, known and inherent risks
in the nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, collateral values, an estimate of
potential loss exposure on significant credits, concentrations of credit, and
economic conditions based on facts then known.
Periodically, management reviews the portfolio, classifying each loan into
categories by assessing the degree of risk involved. After considering this
review, the Bank establishes the adequacy of its allowance and necessary
additions are charged to earnings through the provision for loan losses. The
allowance is an estimate. Ultimate losses may vary from current estimates and
additions to the allowance may be necessary. In addition, regulatory agencies,
as part of the examination process, review the Bank's allowance and may require
the Bank to provide additions to the allowance based on their assessment, which
may differ from management's.
The Bank's allowance for loan losses at December 31, 1998 and 1997, was $4.9
million and $4.3 million, respectively. The Bank's ratio of its allowance for
loan losses to total loans at December 31, 1998 and 1997 was 1.14% and 1.11%,
respectively. The Bank's ratio of its allowance for loan losses to
non-performing loans at December 31, 1998 and 1997 was 320.8% and 110.2%,
respectively.
Management believes the allowance for loan losses was adequate at December 31,
1998 to absorb estimated losses in the loan portfolio. If the economy or real
estate values in the Bank's market decline, additional charge-offs and an
increase in the allowance for loan losses could result.
IMPACT OF INFLATION
The consolidated financial statements and the consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles that require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates typically have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 15, 1997. The
Statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practical, requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that were
previously required by generally accepted accounting principles. The Company has
adopted these disclosure requirements for all periods presented herein.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted
11
<PAGE> 12
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged. Depending
on the type of hedge, such recognition will be in either net income or other
comprehensive income. For a derivative not designed as a hedging instrument,
changes in fair value will be recognized in net income in the period of change.
Management is currently evaluating the impact of adopting this Statement on the
consolidated financial statements, but does not anticipate that it will have a
material impact.
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue exists because many computer systems and applications
currently use the two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900, or, not
at all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
In the discussion that follows, systems refers to the Company's information
technology systems and non-information technology systems.
This section contains certain statements that are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"believe," "expect," "anticipate," "intend," "estimate," "assume," and other
similar expressions which are predictions of or indicate future events and
trends which do not relate to historical matters identify forward-looking
statements. The Company's readiness for the Y2K, and the eventual effects of the
Y2K on the Company may be materially different than currently projected. This
may be due to, among other things, unanticipated delays and expenses in the
completion of the Company's Y2K initiative, the failure of its proposed
contingency plans, if such contingency plans become necessary, to achieve their
desired results and the failure of third parties with whom the Company has a
significant business relationship to achieve Y2K readiness.
To become Y2K compliant, the Company is following the Y2K project management
guidelines provided by the Federal Financial Institutions Examination Council
(FFIEC) interagency statement. The statement outlines five project management
phases essential to Y2K preparedness. The five phases and the Company's status
in its efforts in completing each follows:
* AWARENESS AND ASSESSMENT PHASES: The Company has completed these initial
phases for all systems.
* RENOVATION PHASE: Approximately 3% of the Company's systems are in the
renovation/replacement phase.
* VALIDATION PHASE: Approximately 17% of the Company's hardware and software
systems are in the testing/validation phase.
* IMPLEMENTATION PHASE: In this phase, systems should be certified as Y2K
compliant and be accepted by the Company. Approximately 3% of the systems
are in the implementation phase. Currently, 78% of the Company's systems are
Y2K compliant.
Essentially all reprogramming efforts have been completed as of December 31,
1998. The Company has formed an internal task force, the Y2K Committee, which
meets monthly to monitor the progress of the Company's Y2K plan. An outside
consultant meets with the head of the Y2K Committee each month to ensure
compliance with the Y2K Committee' s schedule.
The Company has initiated formal communications with all of its significant
processing vendors to determine the extent to which the Company is vulnerable to
the failure of those vendors to become Y2K compliant. All critical vendors are
contacted monthly regarding their compliance programs. Based on communications
to date, the Company does not anticipate any Y2K problems with respect to
critical vendors. Other vendors that the Company determined were less critical
were contacted via letter in the assessment phase.
Actual costs for implementing the Company's Y2K plan totaled $44,000 for the
year ending December 31, 1998. These costs were charged to earnings as incurred.
The Company expects that future costs relating to the implementation of the Y2K
plan will not exceed $100,000.
Based on the phases of the Y2K plan completed to date, if the Company is unable
to fully implement its Y2K Plan in a timely manner, there is a risk that some
internal systems will fail, in which case the Company plans to utilize the
systems that are in working order until the non-working systems can be replaced.
Noncompliance by third party vendors would have a greater impact on the Company.
The Company has developed a contingency plan. The contingency plan will be
continually monitored and revised, if necessary, due to changes in the status of
critical third parties. The Company's contract with its primary third party data
processing service bureau, BISYS, states that if the BISYS system currently used
by the Company is not ready for Y2K, the Company's operations will be converted
to another BISYS system which is currently fully Year 2000 compliant at no cost
to the Company. The Company does not anticipate that this conversion will be
necessary.
12
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,794 $ 13,759
Short-term investments 16,016 16,934
--------- ---------
Total cash and cash equivalents 35,810 30,693
Interest-bearing deposits 2,084 --
Securities available for sale 189,739 245,636
Securities held to maturity
(fair value of $186,125 in 1998 and $44,439 in 1997) 186,559 44,253
Restricted equity securities, at cost 19,841 14,824
Loans held for sale 63,918 24,735
Loans, net of allowance for loan losses of $4,866
in 1998 and $4,291 in 1997 423,778 382,407
Other real estate owned, net 105 111
Banking premises and equipment, net 13,927 12,940
Accrued interest receivable 6,418 4,435
Intangible assets 509 1,148
Other assets 1,952 1,728
--------- ---------
Total assets $ 944,640 $ 762,910
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 470,887 $ 355,083
Borrowed funds 416,900 356,550
Mortgagors' escrow accounts 1,408 1,114
Accrued expenses and other liabilities 6,978 6,227
Subordinated debentures 13,800 13,800
--------- ---------
Total liabilities 909,973 732,774
========= =========
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $0.10 par value,
10,000,000 shares authorized, none issued -- --
Common stock, $0.10 par value, 20,000,000 shares
authorized; issued 3,675,218 and 3,643,686 shares 368 364
Additional paid-in capital 23,683 23,400
Retained earnings 17,948 12,253
Accumulated other comprehensive income (loss) (1,119) 332
Treasury stock, at cost -- 355,000 shares (6,213) (6,213)
--------- ---------
Total stockholders' equity 34,667 30,136
--------- ---------
Total liabilities and stockholders' equity $ 944,640 $ 762,910
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 36,377 $ 25,297 $ 19,993
Interest on short-term investments 303 374 154
Interest and dividends on investment securities 25,112 18,829 13,614
-------- -------- --------
Total interest and dividend income 61,792 44,500 33,761
-------- -------- --------
Interest expense:
Interest on deposits 15,239 11,785 10,435
Interest on borrowed funds 24,002 14,400 8,160
-------- -------- --------
Total interest expense 39,241 26,185 18,595
-------- -------- --------
Net interest income 22,551 18,315 15,166
Provision for loan losses 600 100 75
-------- -------- --------
Net interest income, after provision for loan losses 21,951 18,215 15,091
-------- -------- --------
Other income:
Customer service fees 1,390 1,526 1,573
Gains (losses) on sales of securities available for sale, net 1,440 261 (19)
Gains on sales of loans, net 6,481 4,135 2,100
Gains on sales of banking premises and equipment, net -- -- 162
Miscellaneous 146 275 215
-------- -------- --------
Total other income 9,457 6,197 4,031
-------- -------- --------
Operating expenses:
Salaries and employee benefits 10,508 8,711 7,644
Occupancy and equipment 2,163 1,893 1,469
Data processing 1,250 1,184 950
Professional fees 734 858 614
Other real estate owned, net (29) 245 59
Other general and administrative 4,612 3,456 2,942
-------- -------- --------
Total operating expenses 19,238 16,347 13,678
-------- -------- --------
Income before income taxes and cumulative effect of
accounting change 12,170 8,065 5,444
Provision for income taxes 4,370 2,934 1,885
-------- -------- --------
Income before cumulative effect of accounting change 7,800 5,131 3,559
Cumulative effect of accounting change for organization costs,
net of tax (186) -- --
-------- -------- --------
Net income $ 7,614 $ 5,131 $ 3,559
======== ======== ========
Weighted average shares outstanding - assuming dilution for
stock options 3,384,877 3,500,048 3,267,890
Weighted average shares outstanding 3,310,943 3,446,299 3,196,436
Net income per share:
Diluted earnings per share $ 2.25 $ 1.47 $ 1.09
Basic earnings per share 2.30 1.49 1.11
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-----------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 232 $ 14,015 $ 5,870 $ (440) $ -- $ 19,677
--------
Comprehensive income:
Net income -- -- 3,559 -- -- 3,559
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification adjustment and tax effects -- -- -- (381) -- (381)
--------
Total comprehensive income 3,178
--------
Exercise of stock warrants 18 887 -- -- -- 905
Issuance of common stock 97 7,440 -- -- -- 7,537
Cash dividends paid ($0.27 per share) -- -- (867) -- -- (867)
Exercise of stock options 9 625 -- -- -- 634
----- -------- -------- -------- -------- --------
Balance at December 31, 1996 356 22,967 8,562 (821) -- 31,064
--------
Comprehensive income:
Net income -- -- 5,131 -- -- 5,131
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification adjustment and tax effects -- -- -- 1,153 -- 1,153
--------
Total comprehensive income 6,284
--------
Purchase of treasury stock -- -- -- -- (6,213) (6,213)
Cash dividends paid ($0.42 per share) -- -- (1,440) -- -- (1,440)
Exercise of stock options 8 433 -- -- -- 441
----- -------- -------- -------- -------- --------
Balance at December 31, 1997 364 23,400 12,253 332 (6,213) 30,136
--------
Comprehensive income:
Net income -- -- 7,614 -- -- 7,614
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification adjustment and tax effects -- -- -- (1,451) -- (1,451)
--------
Total comprehensive income 6,163
--------
Cash dividends paid ($0.58 per share) -- -- (1,919) -- -- (1,919)
Exercise of stock options 4 283 -- -- -- 287
----- -------- -------- -------- -------- --------
Balance at December 31, 1998 $ 368 $ 23,683 $ 17,948 $ (1,119) $ (6,213) $ 34,667
===== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,614 $ 5,131 $ 3,559
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for loan losses 600 100 75
Depreciation and amortization 1,671 1,137 1,227
Net amortization (accretion) on securities and purchased loans (2,650) (93) 693
Gains on sales of banking premises and equipment -- -- (162)
(Gains) losses on sales of securities available for sale, net (1,440) (261) 19
Gains on sales of other real estate owned, net (71) (1) (145)
Deferred tax provision (benefit) (472) 902 1,500
Net change in:
Loans held for sale (39,183) 877 (20,340)
Other assets, net of other liabilities 642 (181) (435)
--------- --------- ---------
Net cash provided (used) by operating activities (33,289) 7,611 (14,009)
--------- --------- ---------
Cash flows from investing activities:
Cash and cash equivalents received through acquisitions -- -- 20,664
Net change in interest-bearing deposits (2,084) -- --
Activity in securities available for sale:
Sales 271,266 316,904 82,983
Maturities, prepayments and calls 28,215 4,275 2,000
Purchases (343,971) (412,743) (147,350)
Activity in securities held to maturity:
Purchases (164,376) (43,193) --
Maturities, prepayments and calls 36,007 -- --
Purchases of restricted equity securities (5,017) (6,502) (2,195)
Proceeds from amortization of mortgage-backed securities 90,803 32,021 38,779
Proceeds from sales of purchased loans 8,268 -- --
Loan originations and purchases net of amortization and payoffs (53,904) (137,960) (2,176)
Proceeds from sales of other real estate owned 418 1,470 1,118
Proceeds from sale of banking premises and equipment -- -- 424
Additions to banking premises and equipment, net (2,035) (848) (1,929)
--------- --------- ---------
Net cash used in investing activities (136,410) (246,576) (7,682)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 115,804 18,845 16,952
Net (decrease) increase in borrowings with maturities of three
months or less (28,850) 15,950 (52,295)
Proceeds from issuance of borrowings with maturities in excess
of three months 264,700 319,200 99,520
Repayment of borrowings with maturities in excess of three months (175,500) (102,520) (49,550)
Increase in mortgagors' escrow accounts 294 141 30
Proceeds from issuance of common stock -- -- 7,537
Proceeds from exercise of stock options and warrants 287 441 1,539
Net proceeds from issuance of subordinated debentures -- 12,776 --
Payments to acquire treasury stock -- (6,213) --
Cash dividends (1,919) (1,440) (867)
--------- --------- ---------
Net cash provided by financing activities 174,816 257,180 22,866
--------- --------- ---------
Net increase in cash and cash equivalents 5,117 18,215 1,175
Cash and cash equivalents at beginning of year 30,693 12,478 11,303
--------- --------- ---------
Cash and cash equivalents at end of year $ 35,810 $ 30,693 $ 12,478
========= ========= =========
Supplementary information:
Interest paid $ 38,973 $ 24,876 $ 18,324
Income taxes paid, net 4,286 2,093 25
Transfers from loans to other real estate owned 341 1,087 895
Change in due to/from broker, net 262 163 (938)
Assets acquired in acquisitions of branches -- -- 124,845
Liabilities assumed in acquisitions of branches -- -- 145,509
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of People's
Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, People's
Savings Bank of Brockton (the "Bank") and People's Bancshares Capital Trust (the
"Trust"). The Bank formed the Company as a subsidiary of the Bank on March 31,
1995 and completed a reorganization on February 8, 1996, where the Company
became the Bank's parent company. The Trust issued $13.8 million of trust
preferred securities on June 26, 1997 to raise funds to purchase subordinated
debentures from the Company. The Bank's active wholly owned subsidiaries,
People's Mortgage Corporation ("PMC"), organized in March 1995, engages in
mortgage banking and PSB Security Corporation I, II and III organized in
February 1996, engage in the purchase and sale of investment securities. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the consolidated balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. A material estimate that is particularly susceptible to significant
change in the near term relates to the determination of the allowance for loan
losses.
BUSINESS
The Bank provides a variety of financial services to individuals and small
businesses through its offices in southeastern Massachusetts. Its primary
deposit products are savings and term certificate accounts and its primary
lending products are residential and commercial mortgage loans. PMC acts as the
mortgage banking subsidiary.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks and short-term
investments purchased with maturities of three months or less.
INTEREST-BEARING DEPOSITS
Interest-bearing deposits mature within one year and are carried at cost.
INVESTMENT SECURITIES
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. Investments classified as "available for sale" are reflected
at fair value, with unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income (loss). For regulatory
purposes, unrealized gains or losses on debt securities available for sale,
after tax effects, are not recognized in capital.
Restricted equity securities include Federal Home Loan Bank stock and
Massachusetts Savings Bank Life Insurance stock. Purchase premiums and discounts
are amortized to earnings by the interest method over the terms of the
investments. Declines in the value of investments that are deemed to be other
than temporary are reflected in earnings when identified. Gains and losses on
disposition of investments are recorded on the trade date and are computed by
the specific identification method.
LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Net unrealized losses are recognized in a valuation allowance by
charges to earnings, when applicable. Gains and losses on the sale of loans are
recognized at the time of sale based upon the difference between the selling
price and the carrying value of the loans sold. The Company sells only whole
loans servicing released and, accordingly, records only cash gains.
LOANS
The Bank grants mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
southeastern Massachusetts. The ability of the Bank's debtors to honor their
contracts is dependent upon the real estate and construction markets and general
economic sectors.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, loan premiums, and any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance. Net deferred loan
fees or costs and loan premiums are amortized as an adjustment of the related
loan yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of collection. Loans
are placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis until qualifying for return to accrual. Loans
are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the collectibility of
the loan balance is unlikely. Subsequent recoveries are credited to the
allowance. The allowance for loan losses is evaluated periodically by management
and the Board of Directors and is based upon management's review of the
collectibility of the loans in light of the results of the Bank's internal loan
review, historical loan loss experience, trends in delinquent and non-accrual
loans, known and inherent risks in the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, collateral
values, an estimate of potential loss exposure on significant credits,
concentrations of credit, and economic conditions based on facts then known.
This evaluation is inherently subjective
17
<PAGE> 18
as it requires estimates that are susceptible to significant revision as more
information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. An insignificant delay or
insignificant shortfall in the amount of payments does not constitute
impairment. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by the fair value of the
collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer loans for impairment disclosures.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is held for sale and consists of properties
acquired by foreclosure or by deed-in-lieu of foreclosure.
OREO properties are initially recorded at the lower of cost or estimated fair
value less disposition costs. Costs to administer OREO properties are expensed.
Valuations are periodically performed by management and provisions for losses
are charged to other real estate owned expenses if the carrying value of a
property exceeds its fair value less estimated disposition costs.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements, and equipment are
carried at cost, less accumulated depreciation and amortization computed on the
straight-line method over the estimated useful lives of the assets or the terms
of the leases, if shorter.
INTANGIBLE ASSETS
Intangible assets are comprised of deposit premium intangibles and goodwill.
Goodwill is amortized using straight-line amortization method over 15 years.
Deposit premium intangibles are amortized over 8 years using accelerated
amortization methods. (See Note 2.)
RETIREMENT PLAN
The compensation cost of an employee's pension benefit is recognized on the net
periodic pension cost method over the employee's approximate service period. The
aggregate cost method is used for funding purposes.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Company's stock option
plans have no intrinsic value at the grant date, and under Opinion No. 25 no
compensation cost is recognized for them. The Company has elected to continue
with the accounting methodology in Opinion No. 25 and, as a result, must make
pro forma disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting had been applied.
The pro forma disclosures include the effects of all awards granted on or after
January 1, 1995.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. The Bank's base amount of its federal
income tax reserve for loan losses is a permanent difference for which there is
no recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if it is deemed
realizable.
EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed conversion.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Company's net income or stockholders' equity.
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
--------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Unrealized holding gains (losses)
on available-for-sale securities $ (842) $ 2,086 $ (624)
Reclassification adjustment for
(gains) losses realized in income (1,440) (261) 19
-------- ------- ------
Net unrealized gains (losses) (2,282) 1,825 (605)
Tax effect 831 (672) 224
-------- ------- ------
Net-of-tax amount $ (1,451) $ 1,153 $ (381)
======== ======= ======
</TABLE>
18
<PAGE> 19
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 15, 1997. The
Statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practical, requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that were
previously required by generally accepted accounting principles. The Company has
adopted these disclosure requirements for all periods presented herein.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in fair
value will be recognized in net income in the period of change. Management is
currently evaluating the impact of adopting this Statement on the consolidated
financial statements, but does not anticipate that it will have a material
impact.
2 - ACQUISITIONS
On March 8, 1996, the Bank acquired five branches ("Branch Acquisitions") from
Fleet Bank N.A. and Shawmut Bank N.A. ("Fleet/Shawmut"). At the closing of the
Branch Acquisitions on March 8, 1996, the Bank assumed the Fleet/Shawmut
Deposits and paid Fleet/Shawmut a premium on the Fleet/Shawmut Deposits. The
Fleet/Shawmut Deposits totaled $144.7 million. There were no intangible assets
resulting from the Branch Acquisition as $6.6 million of the purchase premium
was allocated to fixed assets and $4.2 million of the purchase premium was
allocated to residential mortgages based on the fair value of the assets.
In the Branch Acquisitions, the Bank acquired certain first mortgage
residential, commercial and commercial real estate and consumer loans of
Fleet/Shawmut (the "Fleet/Shawmut Loans"), as well as the real property owned or
leased by Fleet and Shawmut for operation of the Fleet/Shawmut Branches and
related automated teller machines, furniture, equipment and other fixed
operating assets (the "Fleet/Shawmut Assets").
The Bank acquired the Fleet/Shawmut Loans at face value and the Fleet/Shawmut
Assets at a specific purchase price with the exception of furniture, equipment
and other fixed assets, which were acquired at book value. The Bank acquired an
aggregate of approximately $113.7 million of Fleet/Shawmut Loans. The total
purchase price of the Fleet/Shawmut Assets was $1.8 million.
To enable the Company to comply with applicable minimum equity capital or other
regulatory requirements following the Branch Acquisitions, the Company offered
shares of its common stock at $8.875 per share in a rights offering to
shareholders of record as of February 8, 1996 and "standby" purchasers. The
Company completed the offering on March 8, 1996 raising net proceeds of $7.5
million through the sale of 968,352 shares.
Intangible assets were recorded as a result of the organization costs of forming
People's Mortgage Corporation and People's Bancshares, Inc. as well as the 1995
acquisitions of Minuteman Funding Corporation, the deposits of the Haymarket
Bank Branch, and the deposits of the Bank of Boston's Mansfield Branch. At
December 31, 1998 and 1997, intangible assets amounted to $509,000 and
$1,148,000. Amortization of intangibles amounted to $113,000, $235,000 and
$249,000 for 1998, 1997, and 1996, respectively.
Impaired goodwill related to an underperforming branch of $475,000 was written
off in 1998 and the Company elected to early adopt the provisions of the
Accounting Standards Executive Committee ("ACSEC") Statement of Position 98-5,
"Reporting the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the
costs of start-up activities to be expensed as incurred instead of being
capitalized and amortized. As a result, the Company wrote-off organization costs
of $292,000 effective January 1, 1998. The effect of the accounting change for
the year ended December 31, 1998, was to decrease income before income taxes by
$153,000 and net income by $97,000.
19
<PAGE> 20
3 - INVESTMENT SECURITIES
The following tables summarize the amortized cost and estimated fair value of
investment securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities $ 155,880 $ 76 $ (2,048) $ 153,908
Trust preferred securities 35,620 557 (346) 35,831
--------- ----- -------- ---------
Total securities available for sale $ 191,500 $ 633 $ (2,394) $ 189,739
========= ===== ======== =========
Held to maturity:
U.S. Government and federal
agency obligations $ 73,844 $ 321 $ -- $ 74,165
Mortgage-backed securities 14,408 54 (9) 14,453
Trust preferred securities 93,807 517 (1,317) 93,007
Corporate debt securities 4,500 -- -- 4,500
--------- ----- -------- ---------
Total securities held to maturity $ 186,559 $ 892 $ (1,326) $ 186,125
========= ===== ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and federal
agency obligations $ 27,919 $ 25 $ -- $ 27,944
Mortgage-backed securities 202,047 662 (357) 202,352
Trust preferred securities 14,148 230 (25) 14,353
Corporate debt securities 1,000 -- (13) 987
--------- ----- ------ ---------
Total securities available for sale $ 245,114 $ 917 $ (395) $ 245,636
========= ===== ====== =========
Held to maturity:
U.S. Government and federal
agency obligations $ 44,253 $ 186 $ -- $ 44,439
========= ===== ====== =========
</TABLE>
At December 31, 1998 and 1997, U.S. Government obligations with a carrying value
of $1,300,000 and $719,000, respectively were pledged as collateral for the
Bank's treasury, tax and loan accounts. At December 31, 1998 and 1997,
investment securities with a carrying value of $125,934,000 and $117,110,000,
respectively, were pledged as collateral on securities sold under agreements to
repurchase.
The amortized cost and estimated fair value of investment securities by
contractual maturity at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
After 5 years to 10 years $ -- $ -- $ 6,639 $ 6,636
Over 10 years 35,620 35,831 165,512 165,036
--------- --------- --------- ---------
35,620 35,831 172,151 171,672
Mortgage-backed securities 155,880 153,908 14,408 14,453
--------- --------- --------- ---------
$ 191,500 $ 189,739 $ 186,559 $ 186,125
========= ========= ========= =========
</TABLE>
For the years ended December 31, 1998, 1997, and 1996, proceeds from sales of
securities available for sale amounted to $271,266,000, $316,904,000, and
$82,983,000, respectively. Gross realized gains amounted to $1,950,000,
$1,201,000, and $273,000 in 1998, 1997, and 1996, respectively, and gross
realized losses amounted to $510,000, $940,000, and $292,000, in 1998, 1997, and
1996, respectively.
4 - LOANS, NET
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
-----------------------
(Dollars in thousands)
<S> <C> <C>
Mortgage loans:
Residential 1-4 family $ 321,612 $ 293,402
Residential multi-family 11,264 11,030
Commercial real estate 54,104 44,714
Construction 20,118 11,162
Equity lines of credit 10,197 10,152
417,295 370,460
--------- ---------
Deferred loan origination fees, net (56) (113)
Undisbursed amount on loans in process (4,975) (2,239)
--------- ---------
Total mortgage loans 412,264 368,108
--------- ---------
Other loans:
Retail installment sale contracts 375 915
Consumer 4,806 5,007
Commercial lines of credit 5,030 6,089
Commercial 6,098 6,433
Education 71 146
--------- ---------
Total other loans 16,380 18,590
--------- ---------
Total loans 428,644 386,698
Allowance for loan losses (4,866) (4,291)
--------- ---------
Loans, net $ 423,778 $ 382,407
========= =========
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
--------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 4,291 $ 4,716 $ 3,813
Provision for loan losses 600 100 75
Loans charged off (575) (727) (1,131)
Recoveries 550 202 307
Allowance for loan losses
acquired in acquisition -- -- 1,652
------- ------- -------
Balance at end of year $ 4,866 $ 4,291 $ 4,716
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, premiums on residential mortgage loans purchased
or acquired in acquisitions included in loans, net amounted to $5,338,000 and
$6,152,000, respectively. Amortization of premiums amounted to $2,807,000,
$615,000, and $404,000 for 1998, 1997, and 1996, respectively.
The following is a summary of information pertaining to impaired and non-accrual
loans:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Impaired loans without a valuation allowance $ 47 $ --
Impaired loans with a valuation allowance 1,470 3,894
------- -------
Total impaired loans $ 1,517 $ 3,894
======= =======
Valuation allowance allocated to impaired loans $ 230 $ 576
======= =======
Non-accrual loans $ 1,517 $ 3,894
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
--------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Average investment in impaired loans $ 2,675 $ 3,764 $ 4,752
======= ======= =======
Interest income recognized on
impaired loans $ 103 $ 171 $ 261
======= ======= =======
Interest income recognized on
a cash basis on impaired loans $ 103 $ 171 $ 261
======= ======= =======
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
20
<PAGE> 21
5 - OTHER REAL ESTATE OWNED, NET
Other real estate owned consists of $105,000 and $111,000 of residential real
estate at December 31, 1998 and 1997. OREO expenses (income) include the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net gain on sales $ (71) $ (15) $ (145)
Write-downs to net realizable value -- 14 --
Operating expenses, net of rental income 42 246 204
----- ----- ------
$ (29) $ 245 $ 59
===== ===== ======
</TABLE>
6 - BANKING PREMISES AND EQUIPMENT, NET
A summary of the cost, accumulated depreciation and amortization, and estimated
useful lives of banking premises and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- ESTIMATED
1998 1997 USEFUL LIVES
------------------------------------
(Dollars in thousands)
<S> <C> <C>
Land $ 1,391 $ 1,452
Buildings 8,411 8,482 20 to 39 years
Leasehold improvements 1,245 1,218 Terms of lease
Furniture and equipment 6,309 4,860 5 to 10 years
Construction-in-progress 601 --
-------- ------
$ 17,957 16,012
Less accumulated depreciation
and amortization (4,030) (3,072)
-------- --------
$ 13,927 $ 12,940
======== ========
</TABLE>
Construction-in-progress includes land and improvements for a branch which will
be completed in February 1999. An estimated $230,000 is needed to complete the
construction.
Depreciation and amortization expense for the years ended December 31, 1998,
1997, and 1996 amounted to $1.1 million, $951,000, and $546,000, respectively.
Under terms of noncancelable lease agreements in effect at December 31, 1998 for
banking premises and equipment, future minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Amount
----------------------------------------
(Dollars in thousands)
<C> <C>
1999 $ 315
2000 264
2001 78
2002 36
2003 6
-----
$ 699
=====
</TABLE>
The leases contain options to extend for periods from three to ten years. The
cost of such rentals is not included above. Total rent expense for 1998, 1997,
and 1996, amounted to $436,000, $333,000, and $302,000, respectively.
7 - INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
-------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $ 4,315 $ 2,184 $ 1,059
State 582 257 124
Utilization of operating
loss carryforwards -- -- (635)
Utilization of tax credits (55) (409) (163)
------- ------- -------
Total current 4,842 2,032 385
------- ------- -------
Deferred:
Federal (331) 799 1,469
State (84) 148 167
------- ------- -------
Total deferred (415) 947 1,636
------- ------- -------
Changes in valuation reserve (57) (45) (136)
------- ------- -------
Income tax provision before effect of
accounting change 4,370 2,934 1,885
Effect of change in accounting for
organization costs (106) -- --
------- ------- -------
Income tax provision $ 4,264 $ 2,934 $ 1,885
======= ======= =======
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax asset:
Federal $ 2,489 $ 1,862
State 752 805
------- --------
3,241 2,667
Valuation reserve on asset -- (114)
------- --------
3,241 2,553
------- --------
Deferred tax liability:
Federal (2,123) (2,649)
State (733) (928)
------- --------
(2,856) (3,577)
------- --------
Net deferred tax asset (liability) $ 385 $ (1,024)
======= ========
</TABLE>
The tax effects of each type of item that gives rise to deferred taxes are:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses $ 937 $ 121
Deferred pension expense 245 326
Unrealized (gain) loss on securities
available for sale 641 (190)
Investment in limited partnership (944) (863)
Other investments (534) (534)
Depreciation (323) (208)
Tax loss carryovers -- 155
Other, net 363 283
----- --------
385 (910)
Valuation reserve -- (114)
----- --------
Net deferred tax asset (liability) $ 385 $ (1,024)
===== ========
</TABLE>
21
<PAGE> 22
A summary of the change in the net deferred tax asset (liability) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ (1,024) $ 550 $ 1,826
Deferred tax (provision) benefit 415 (947) (1,636)
Deferred tax effects on unrealized (gains)
losses on securities available for sale 831 (672) 224
Deferred tax resulting from change
in accounting method 106 -- --
Utilization of valuation reserve 57 45 136
-------- -------- --------
Balance at end of year $ 385 $ (1,024) $ 550
======== ======== ========
</TABLE>
A summary of the change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 114 $ 159 $ 311
Change in assumptions due to
anticipation of future income (57) (45) (136)
Benefits expired (57) -- (16)
----- ----- -----
Balance at end of year $ -- $ 114 $ 159
===== ===== =====
</TABLE>
The reasons for the differences between the tax at the statutory federal income
tax rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------------------------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 2.8 3.3 2.4
Other, net (0.9) (0.9) (1.8)
---- ---- ----
Effective tax rates 35.9% 36.4% 34.6%
==== ==== ====
</TABLE>
The federal income tax reserve for loan losses at the Bank's base year is
$2,020,000. If any portion of the reserve is used for purposes other than to
absorb loan losses, approximately 150% of the amount actually used (limited to
the amount of the reserve) would be subject to taxation in the fiscal year in
which used. As the Bank intends to use the reserve only to absorb loan losses, a
deferred income tax liability of approximately $825,000 has not been provided.
8 - DEPOSITS
A summary of deposit balances, by type, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Demand $ 42,702 $ 34,959
NOW 48,915 40,590
Savings 95,829 88,083
Money market 37,712 26,087
--------- ---------
Total non-certificate accounts 225,158 189,719
--------- ---------
Term certificates of $100,000 or more 134,842 66,732
Term certificates less than $100,000 110,887 98,632
--------- ---------
Total certificate accounts 245,729 165,364
--------- ---------
Total deposits $ 470,887 $ 355,083
========= =========
</TABLE>
Municipal deposits amounted to $141.6 million and $57.4 million at December 31,
1998 and 1997, respectively.
A summary of certificate accounts, by maturity, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 218,983 5.15% $ 140,205 5.50%
Over 1 year to 3 years 22,445 5.69 21,324 5.97
Over 3 years to 5 years 4,171 5.88 3,717 5.95
Over 5 years 130 6.80 118 6.80
--------- ---------
$ 245,729 5.21% $ 165,364 5.57%
========= =========
</TABLE>
9 - BORROWED FUNDS
The following summarizes borrowed funds:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Securities sold under agreements to repurchase $ 96,900 $ 96,050
Federal Home Loan Bank advances 320,000 260,500
--------- ---------
$ 416,900 $ 356,550
========= =========
</TABLE>
The amount of securities collateralizing the agreements to repurchase remains in
investment securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets. The securities
underlying the agreement are held by the dealers who arranged the transactions.
The dealers may have disposed of the securities in the normal course of their
operations, and have agreed to resell substantially identical securities at the
maturities of the agreements to the Bank. The highest month-end balance for 1998
and 1997 was $123,400,000 and $96,050,000, respectively. The average balances of
repurchase agreements during 1998 and 1997 were $104,395,000 and $73,734,000,
respectively. For the years ended December 31, 1998, 1997, and 1996 interest
expense on repurchase agreements was $6.1 million, $4.4 million, and $1.7
million, respectively. A summary of fixed rate securities sold under agreements
to repurchase by maturity follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
-------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 8,700 5.74% $ 17,850 5.81%
Over 1 year through 3 years 31,500 5.85 45,500 5.78
Over 3 years through 5 years 32,700 6.10 32,700 6.10
Over five years 24,000 5.21 -- --
-------- --------
$ 96,900 5.77% $ 96,050 5.90%
======== ========
</TABLE>
Certain securities sold under agreements to repurchase have call options. Under
these options $45.0 million is callable in 1999, $32.7 million is callable in
2000, and $10.5 million is callable in 2001.
The Bank has an available line of credit of $15 million with the Federal Home
Loan Bank of Boston ("FHLB") at an interest rate that adjusts daily. Borrowings
under the line are limited to 2% of the Bank's total assets. There were no
outstanding advances under the line of credit at December 31, 1998 or 1997. The
FHLB advances are secured by a blanket lien on qualified collateral, defined
principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property and 90% of the market value of certain U.S.
Government and federal agency securities. A summary of fixed rate FHLB advances
by maturity follows:
22
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 2,000 5.94% $ 160,500 5.71%
Over 1 year through 3 years 35,000 5.68 26,000 6.06
Over 3 years through 5 years 74,000 5.71 74,000 5.71
Over five years 209,000 5.32 -- --
--------- ---------
$ 320,000 5.45% $ 260,500 5.75%
========= =========
</TABLE>
Certain FHLB advances have call options. Under these options $174.0 million is
callable in 1999, $25.0 million is callable in 2000, $47.0 million is callable
in 2001, $26.0 million is callable in 2003 and $13.0 million is callable in
2005.
For the years ended December 31, 1998, 1997, and 1996 interest expense on FHLB
advances was $16.5 million, $9.3 million, and $6.5 million, respectively.
10 -- SUBORDINATED DEBENTURES
On June 26, 1997, the Company raised net proceeds of $12.8 million in a sale of
$13.8 million of subordinated debentures to People's Bancshares Capital Trust
which funded the purchase through a public offering of 1,380,000 trust preferred
securities with a liquidation value of $10 each. Using interest payments made by
the Company on the debentures, the Trust pays quarterly dividends to preferred
security holders. The annual percentage rate of interest payable on the
subordinated debentures and distributions payable on the preferred securities is
9.76%. Dividends on the preferred securities will be cumulative and the Trust
may defer the payments for up to five years. The preferred securities mature in
June 2027 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to as early as June 2002. This subordinated debt
may be included in regulatory Tier 1 capital subject to a limitation that such
amounts not exceed 25% of Tier 1 capital. At December 31, 1998, all such
subordinated debt is included in total risk-based capital. For the years ended
December 31, 1998 and 1997 interest expense on subordinated debentures amounted
to $1.4 million and $709,000, respectively. Deferred debt financing costs of
$984,000 and $1,007,000 are included in other assets at December 31, 1998 and
1997, respectively. These costs are being amortized over the life of the
debentures. Amortization of deferred debt financing costs for 1998 and 1997 were
$35,000 and $17,000, respectively, and are included in interest expense.
11 -- OTHER COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies that are not reflected in the consolidated financial statements.
SPECIAL TERMINATION AGREEMENTS
The Company has severance agreements with certain officers that provide for a
lump-sum severance payment under certain circumstances following a "change in
control" as defined in the agreements.
LOAN COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, lines of credit, and
standby letters of credits. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The Bank's exposure to credit loss is
represented by the contractual amount of these commitments. The Bank uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
The following financial instruments were outstanding, the contract amounts of
which represent credit risk:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Commitments to grant loans $ 44,358 $ 40,033
Undistributed amount on loans in process 4,975 2,239
Unfunded commitments under lines of credit 24,119 23,508
Standby letters of credit 745 485
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. Funds disbursed under these financial
instruments are generally collateralized by real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support borrowing arrangements. All letters of
credit outstanding as of December 31, 1998, have expiration dates within one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The letters of
credit are generally secured.
BORROWING COMMITMENT
The Bank has a commitment with the FHLB to borrow $10.0 million at 3.99%
settling on March 22, 1999.
OTHER CONTINGENCIES
In the ordinary course of business, the Company is involved in various legal
claims that, in the opinion of management, will not have a material effect on
the Company's consolidated financial position or results of operations.
12 - STOCKHOLDERS' EQUITY
MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum
23
<PAGE> 24
amounts and ratios (set forth in the following table) of total and Tier 1
capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of December
31, 1998, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since the notification that management believes have
changed the Bank's category. The Company's and the Bank's actual capital amounts
and ratios as of December 31, 1998, and 1997 are also presented in the table.
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
----------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Total Capital to Risk-Weighted Assets:
Consolidated $ 53,942 10.22% $ 42,222 8.0% $ N/A N/A%
Bank 53,278 10.07 42,313 8.0 52,892 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 47,205 8.94 21,111 4.0 N/A N/A
Bank 48,412 9.15 21,157 4.0 31,735 6.0
Tier 1 Capital to Average Assets:
Consolidated 47,205 5.05 37,390 4.0 N/A N/A
Bank 48,412 5.18 37,367 4.0 46,709 5.0
DECEMBER 31, 1997
Total Capital to Risk-Weighted Assets:
Consolidated $ 46,749 11.23% $ 33,293 8.0% $ N/A N/A%
Bank 42,870 10.43 32,889 8.0 41,112 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 38,593 9.27 16,647 4.0 N/A N/A
Bank 38,579 9.38 16,445 4.0 24,667 6.0
Tier 1 Capital to Average Assets:
Consolidated 38,593 5.25 29,432 4.0 N/A N/A
Bank 38,579 5.26 29,344 4.0 36,680 5.0
</TABLE>
13 - EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Bank provides pension benefits for eligible employees through a defined
benefit pension plan. Substantially all employees participate in the retirement
plan on a non-contributing basis and are fully vested after three years of
service. Information pertaining to the activity in the plan is as follows:
<TABLE>
<CAPTION>
PLAN YEARS ENDED
OCTOBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,059 $ 1,915
Service cost 404 181
Interest cost 149 144
Actuarial loss 383 346
Benefits paid (174) (527)
------- -------
Benefit obligation at end of year 2,821 2,059
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,095 2,273
Actual return on plan assets 185 349
Employer contribution 521 --
Benefits paid (174) (527)
------- -------
Fair value of plan assets at end of year 2,627 2,095
------- -------
Funded status 194) 36
Unrecognized net actuarial gain (299) (692)
Unamortized net surplus since adoption of SFAS
No. 87 (115) (123)
------- -------
Accrued pension costs $ (608) $ (779)
======= =======
</TABLE>
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
PLAN YEARS ENDED OCTOBER 31,
----------------------------
1998 1997 1996
----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $ 404 $ 181 $ 106
Interest cost 149 144 125
Expected return on plan assets (167) (182) (294)
Amortization of transition asset (8) (8) (8)
Recognized net actuarial (gain) loss (28) (36) 113
----- ----- ------
$ 350 $ 99 $ 42
===== ===== ======
</TABLE>
Total pension expense for the years ended December 31, 1998, 1997, and 1996
amounted to $362,000, $128,000, and $38,000, respectively. The accumulated
benefit obligation (substantially all vested) at October 31, 1998, amounted to
$1,847,000 which was less than the fair value of plan assets at that date.
For the plan years ended October 31, 1998, 1997, and 1996, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.25%, 7.50%, and
7.5%, respectively and an expected long term rate of return on plan assets of 8%
for all years. An annual salary increase of 4% was used for 1998 and 5% was used
for 1997 and 1996.
401(K) PLAN
The Company has a 401(k) plan that provides for voluntary contributions by
participating employees ranging from one to fifteen percent of their
compensation, subject to certain limitations. Under terms of the plan the
Company at its discretion will match one half of an employee's contribution to
the 401(k) plan subject to a maximum match of 3% of the employee's base salary.
The Company's expense for this plan for the years ended December 31, 1998, 1997,
and 1996 was $272,000, $214,000, and $36,000, respectively.
24
<PAGE> 25
14 - STOCK OPTION PLANS
At December 31, 1998, the Company has three stock-based compensation plans.
Under the 1995 Employee and Director Stock Option Plans and the 1996 Stock
Option and Incentive Plan, the Company may grant options to its directors,
officers and employees for up to 564,000 shares of common stock. Both incentive
stock options and non-qualified stock options may be granted under the Plans.
The exercise price of each option equals the market price of the Company's stock
on the date of grant and an option's maximum term is ten years.
The Company applies APB Opinion 25 and related Interpretations in accounting for
the Plans. Accordingly, no compensation cost has been recognized for its stock
plans. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method prescribed by SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
-------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Net income As reported $ 7,614 $ 5,131 $ 3,559
Pro forma $ 7,220 $ 4,884 $ 3,404
Basic earnings per share As reported $ 2.30 $ 1.49 $ 1.11
Pro forma $ 2.18 $ 1.42 $ 1.06
Diluted earnings per share As reported $ 2.25 $ 1.47 $ 1.09
Pro forma $ 2.13 $ 1.40 $ 1.04
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Dividend yield 2.31% 2.88% 2.75%
Expected life 9 years 10 years 10 years
Expected volatility 34% 24% 36%
Risk-free interest rate 5.5% 6.5% 7.0%
</TABLE>
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997, and 1996, and changes during the years then ended, is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------------------------------------------------
(In thousands, except weighted average exercise price)
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at
beginning of year 185 $ 10.55 172 $ 6.09 200 $ 5.52
Granted 90 24.00 94 14.56 63 9.56
Exercised (31) 9.09 (81) 5.75 (89) 7.09
Canceled -- -- -- -- (2) 9.50
--- ------- --- ------- --- ------
Outstanding at end of year 244 $ 15.72 185 $ 10.55 172 $ 6.09
=== ======= === ======= === ======
Options exercisable
at year-end 186 $ 13.68 165 $ 10.09 172 $ 6.09
Shares reserved for
future grants 119 209 303
Weighted-average
fair value of options
granted during the year $ 9.28 $ 4.69 $ 3.78
</TABLE>
Information pertaining to options outstanding at December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
$4.00 -- 14.50 139 7.1 years $ 9.91 129 $ 9.57
$14.75 -- 24.00 105 9.4 years 23.47 57 23.02
--- ---
Outstanding at
end of year 244 8.1 years $ 15.72 186 $ 13.68
=== ===
</TABLE>
15 - EMPLOYEES' STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (the "ESOP") for eligible
employees that was funded by the Company. Benefits may be paid in shares of
common stock or in cash. There was no ESOP expense during 1998, 1997, and 1996.
Shares held by the ESOP were 1,087 and 24,351 at December 31, 1998 and 1997,
respectively, all of which were allocated.
16 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to principal
officers and directors and their affiliates. Such loans totaled $2,647,000 at
December 31, 1998, and $2,502,000 at December 31, 1997. During 1998, total
principal additions were $888,000 and total principal payments were $743,000.
17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Investment securities: Fair values for these investments, excluding
interest-bearing deposits and restricted equity securities, are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. The carrying
values of interest-bearing deposits and restricted equity securities approximate
fair values.
Loans receivable: Fair values for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. For installment loans and loans
that reprice frequently at market rates, the fair values are based on carrying
values. Fair values for non-performing loans are estimated using discounted cash
flow analyses or underlying collateral values, where applicable. The carrying
value of loans held for sale approximates fair values.
25
<PAGE> 26
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings, and certain types of money
market accounts) are their carrying amounts. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Borrowed funds: The carrying amounts of borrowings under repurchase agreements
maturing within 90 days approximate their fair values. The fair values of all
other borrowings are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Subordinated debentures: Fair value for subordinated debentures is based on the
quoted market price of the trust preferred securities underlying the
subordinated debentures.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997
------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 35,810 $ 35,810 $ 30,693 $ 30,693
Interest-bearing deposits 2,084 2,084 -- --
Securities available for sale 189,739 189,739 245,636 245,636
Securities held to maturity 186,559 186,125 44,253 44,439
Restricted equity securities 19,841 19,841 14,824 14,824
Loans held for sale 63,918 63,918 24,735 24,735
Loans, net 423,778 424,174 382,407 383,170
Accrued interest receivable 6,418 6,418 4,435 4,435
Financial liabilities:
Deposits 470,887 471,698 355,083 355,377
Borrowed funds 416,900 423,763 356,550 356,010
Accrued interest payable 2,691 2,691 2,423 2,423
Subordinated debentures 13,800 14,145 13,800 14,760
</TABLE>
The estimated fair values of off-balance-sheet financial instruments at December
31, 1998 and 1997 are immaterial.
18 -- RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends which may be paid at any date is generally limited to the retained
earnings of the Bank, and loans and advances are limited to 10% of the Bank's
capital stock and surplus on a secured basis.
At December 31, 1998, the Bank's retained earnings available for the payment of
dividends was approximately $16.8 million and funds available for loans and
advances amounted to $4.7 million. Accordingly, $30.5 million of the Company's
equity in the net assets of the Bank was restricted at December 31, 1998.
In addition, dividends paid by the Bank to the Company would be prohibited if
the effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
19 -- SEGMENT INFORMATION
The Company has two reportable segments, the Bank and the mortgage company. The
Bank segment attracts deposits from individuals, businesses and governments, and
invests those funds in residential and commercial mortgages and consumer,
commercial and construction loans. The mortgage company segment originates 1-4
family residential loans primarily for sale in the secondary market.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes excluding
nonrecurring gains or losses.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and, accordingly, requires different
technology and marketing strategies.
The Company derives a significant portion of its revenues from interest income,
and interest expense is the most significant expense. Management analyzes the
segments based on pre-tax income and therefore the segments are reported below
using pre-tax income for the years ended December 31. The Company does not
allocate income taxes to the segments.
<TABLE>
<CAPTION>
MORTGAGE
----------------------------------
BANK COMPANY TOTAL
----------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Net interest income,
after provision for loan losses $ 19,724 $ 2,227 $ 21,951
Other income 2,972 6,485 9,457
Operating expense 12,766 6,472 19,238
--------- -------- -----------
Income before income taxes $ 9,930 $ 2,240 $ 12,170
========= ======== ===========
Total assets $ 939,168 $ 71,580 $ 1,010,748
========= ======== ===========
Depreciation expense $ 884 $ 166 $ 1,050
========= ======== ===========
Capital expenditures $ 1,265 $ 770 $ 2,035
========= ======== ===========
DECEMBER 31, 1997
Net interest income,
after provision for loan losses $ 16,957 $ 1,258 $ 18,215
Other income 2,073 4,124 6,197
Operating expense 11,987 4,360 16,347
--------- -------- -----------
Income before income taxes $ 7,043 $ 1,022 $ 8,065
========= ======== ===========
Total assets $ 760,327 $ 26,731 $ 787,058
========= ======== ===========
Depreciation expense $ 858 $ 93 $ 951
========= ======== ===========
Capital expenditures $ 637 $ 211 $ 848
========= ======== ===========
DECEMBER 31, 1996
Net interest income,
after provision for loan losses $ 14,517 $ 574 $ 15,091
Other income 1,883 2,148 4,031
Operating expense 10,749 2,929 13,678
--------- -------- -----------
Income (loss) before income taxes $ 5,651 $ (207) $ 5,444
========= ======== ===========
Total assets $ 495,428 $ 27,707 $ 523,135
========= ======== ===========
Depreciation expense $ 491 $ 55 $ 546
========= ======== ===========
Capital expenditures $ 1,721 $ 208 $ 1,929
========= ======== ===========
</TABLE>
The following reconciles the above tables to the amounts shown on the
consolidated financial statements for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Total assets:
Total assets for reportable segments $ 1,010,748 $ 787,058 $ 523,135
Elimination of intersegment assets (66,108) (24,148) (27,002)
----------- --------- ---------
$ 944,640 $ 762,910 $ 496,133
=========== ========= =========
</TABLE>
26
<PAGE> 27
20 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to People's Bancshares, Inc. is as
follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 50 $ 62
Securities available for sale -- 3,214
Investment in common stock of Bank 47,293 39,675
Investment in common stock of Trust 427 427
Due from Bank 137 --
Organization costs, net of accumulated amortization -- 140
Deferred debt financing costs and other assets 987 1,083
-------- --------
Total assets $ 48,894 $ 44,601
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ -- $ 15
Due to Bank -- 223
Subordinated debentures 14,227 14,227
-------- --------
Total liabilities 14,227 14,465
-------- --------
Stockholders' equity:
Serial preferred stock -- --
Common stock 368 364
Additional paid-in capital 23,683 23,400
Retained earnings 17,948 12,253
Accumulated other comprehensive income (loss) (1,119) 332
Treasury stock, at cost -- 355,000 shares (6,213) (6,213)
-------- --------
Total stockholders' equity 34,667 30,136
-------- --------
Total liabilities and stockholders' equity $ 48,894 $ 44,601
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FOR THE PERIOD
------------------ FEB. 8, 1996 TO
1998 1997 DEC. 31, 1996
----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
INCOME:
Dividends from Bank $ 2,943 $ 3,565 $ 751
Dividends from Trust 42 21 --
Interest on investment securities 115 77 --
Interest on short-term investments 10 157 --
Gains on sale of securities available for sale 65 -- --
------- ------- -------
Total income 3,175 3,820 751
------- ------- -------
EXPENSES:
Interest on subordinated debentures 1,423 731 --
Operating expenses 158 134 41
Amortization of organization costs -- 46 42
------- ------- -------
Total operating expenses 1,581 911 83
------- ------- -------
Income before income taxes 1,594 2,909 668
Income tax benefit (458) (223) (28)
------- ------- -------
Income before cumulative effect
of accounting change 2,052 3,132 696
Cumulative effect of accounting change
for organization costs, net of tax (89) -- --
------- ------- -------
Income before equity in undistributed
income of Bank 1,963 3,132 696
Equity in undistributed income of Bank 5,651 1,999 2,662
------- ------- -------
Net income $ 7,614 $ 5,131 $ 3,358
======= ======= =======
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FOR THE PERIOD
------------------ FEB. 8, 1996 TO
1998 1997 DEC. 31, 1996
----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,614 $ 5,131 $ 3,358
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of Bank (5,651) (1,999) (2,662)
Amortization/write-off of organization costs 140 46 42
Gains on sales of securities available for sale (65) -- --
Increase (decrease) in accrued expenses -- (2) 2
Increase (decrease) in due to Bank (360) (66) 289
Decrease (increase) in other assets 68 (63) --
------- ------- -------
Net cash provided by operating activities 1,746 3,047 1,029
------- ------- -------
Cash flows from investing activities:
Investments in subsidiaries (1,297) (5,856) --
Purchase of securities available for sale (519) (3,174) --
Sales of securities available for sale 1,690 -- --
Organization costs -- -- (228)
------- ------- -------
Net cash used for investing activities (126) (9,030) (228)
------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 287 441 --
Proceeds from issuance of subordinated
debentures -- 13,207 --
Payments to acquire treasury stock -- (6,213) --
Cash dividends paid on common stock (1,919) (1,440) (751)
------- ------- -------
Net cash provided (used) by financing
activities (1,632) 5,995 (751)
------- ------- -------
Net change in cash and cash equivalents (12) 12 50
Cabsh and cash equivalents,
beginning of period 62 50 --
------- ------- -------
Cash and cash equivalents, end of period $ 50 $ 62 $ 50
======= ======= =======
</TABLE>
27
<PAGE> 28
21 - QUARTERLY DATA (UNAUDITED)
Quarterly consolidated operating results are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $ 17,299 $ 16,091 $ 14,669 $ 13,733
Interest expense 10,740 10,146 9,450 8,905
-------- -------- -------- --------
Net interest income 6,559 5,945 5,219 4,828
Provision for loan losses 150 150 150 150
-------- -------- -------- --------
Net interest income,
after provision for loan losses 6,409 5,795 5,069 4,678
Other income 2,760 2,918 2,092 1,687
Operating expenses 5,091 5,242 4,831 4,074
-------- -------- -------- --------
Income before income taxes 4,078 3,471 2,330 2,291
Provision for income taxes 1,460 1,233 844 833
-------- -------- -------- --------
Income before cumulative
effect of accounting change 2,618 2,238 1,486 1,458
Cumulative effect of accounting change
for organization costs, net of tax -- -- -- (186)
-------- -------- -------- --------
Net income $ 2,618 $ 2,238 $ 1,486 $ 1,272
======== ======== ======== ========
Diluted earnings per share $ 0.78 $ 0.66 $ 0.44 $ 0.38
Basic earnings per share 0.79 0.68 0.45 0.39
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $ 13,090 $ 11,394 $ 10,286 $ 9,729
Interest expense 8,438 6,764 5,668 5,315
-------- -------- -------- -------
Net interest income 4,652 4,630 4,618 4,414
Provision for loan losses 100 -- -- --
-------- -------- -------- -------
Net interest income,
after provision for loan losses 4,552 4,630 4,618 4,414
Other income 2,054 1,526 1,335 1,282
Operating expenses 4,520 4,240 3,938 3,648
-------- -------- -------- -------
Income before income taxes 2,086 1,916 2,015 2,048
Provision for income taxes 758 697 738 741
-------- -------- -------- -------
Net income $ 1,328 $ 1,219 $ 1,277 $ 1,307
======== ======== ======== =======
Diluted earnings per share $ 0.40 $ 0.36 $ 0.35 $ 0.36
Basic earnings per share 0.40 0.37 0.36 0.36
</TABLE>
Fluctuations in the quarterly results are due primarily to the effect of the
seasonality of the mortgage-banking subsidiary, gains on sales of investments
and various non-recurring expenses. The Company had non-recurring charges of
$72,000 and $114,000 in the first and second quarter of 1998, respectively,
related to prepayment penalties incurred on early retirement of debt. In the
third quarter of 1998 the Company wrote-off $475,000 of goodwill and expensed
$75,000 related to the closing of a branch. The Company had non-recurring
charges of $268,000 associated with the closing of two branches in the fourth
quarter of 1997.
ASSESSMENT OF INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting, including controls over the
safeguarding of assets, presented in conformity with both generally accepted
accounting principles and the Federal Financial Institutions Examination Council
instructions for Consolidated Reports of Condition and Income (call report
instructions). The structure contains monitoring mechanisms, and actions are
taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1998. This assessment
was based on criteria for effective internal control over financial reporting
described in "Internal Control -- Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 1998, People's
Bancshares, Inc. and subsidiaries maintained an effective internal control
structure over financial reporting presented in conformity with both generally
accepted accounting principles and call report instructions.
/s/ Richard S. Straczynski /s/ Colin C. Blair
- ------------------------------------- ------------------------------------
Richard S. Straczynski Colin C. Blair
President and Chief Executive Officer Chief Financial Officer
28
<PAGE> 29
INDEPENDENT AUDITORS' REPORTS
To the Board of Directors and Stockholders of People's Bancshares, Inc.:
We have audited the consolidated balance sheets of People's Bancshares, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of People's Bancshares,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the Accounting Standards Executive Committee Statement of Position 98-5,
"Reporting the Costs of Start-Up Activities," effective January 1, 1998.
Boston, Massachusetts
January 26, 1999
To the Board of Directors and Stockholders of People's Bancshares, Inc.
We have examined management's assertion that People's Bancshares, Inc. and
subsidiaries maintained an effective internal control structure over financial
reporting, including controls over the safeguarding of assets, as of December
31, 1998, included in the accompanying report on ASSESSMENT OF INTERNAL CONTROLS
OVER FINANCIAL REPORTING, presented in conformity with both generally accepted
accounting principles and call report instructions.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure, and such other procedures we considered necessary in
the circumstances. We believe that our examination provides a reasonable basis
for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assertion that People's Bancshares, Inc. and
subsidiaries maintained an effective internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1998, is fairly
stated, in all material respects, based on INTERNAL CONTROL -- INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Boston, Massachusetts
January 26, 1999
29
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS OFFICERS
Frederick W. Adami, III Esq. PEOPLE'S BANCSHARES, INC.
Attorney,
Adami, Reed, & Kaiser Richard S. Straczynski
President & Chief Executive Officer
Virginia M. Burke
Retired, Regional Public Affairs Manager, Colin C. Blair
NYNEX Chief Financial Officer
Benjamin Cavallo
Partner, PEOPLE'S SAVINGS BANK OF BROCKTON
Cavallo & Signoriello Insurance Agency
Richard S. Straczynski
John R. Eaton President & Chief Executive Officer
Executive Vice President,
Cushman & Eaton Insurance Agency, Inc. Colin C. Blair
Chief Financial Officer
Terrence Gomes
Vice President & Dean of Faculty & Instruction, George M. Custodio
Massasoit Community College Treasurer
Dr. Loring C. Johnson Donna L. Boulanger
Orthodontist Senior Lending Officer
Richard D. Matthews Maureen A. Gregory
President and Treasurer, Branch Administrator
R.D. Matthews Construction Co., Inc.
Jean M. Levesque
Scott W. Ramsay Comptroller
Senior Vice President/Retail
Shaws Supermarkets
PEOPLE'S MORTGAGE CORPORATION
Davis H. Scudder
Executive Vice President Richard S. Straczynski
Treasurer, Chief Executive Officer
Scudder Bros. Fuel Co., Inc.
John J. Kiernan, Jr.
Stanley D. Siskind President
Retired, First Vice President,
Rix Dunnington, Inc. Colin C. Blair
Chief Financial Officer
Richard S. Straczynski
President & Chief Executive Officer, James F. Ryder
People's Bancshares, Inc. Executive Vice President
SHAREHOLDER INFORMATION Andrew A. Brown
Comptroller
Stock Listing: People's Bancshares, Inc.
common stock is quoted on the NASDAQ National INDEPENDENT AUDITORS
Market System. Current price information on the
Company's stock may be found in major daily Wolf & Company, P.C.
newspaper stock tables. One International Place
Boston, Massachusetts 02110
Trading Symbol: "PBKB"
</TABLE>
30
<PAGE> 31
The following table sets forth the high and low closing prices for the period
indicated:
HIGH LOW
1998 -----------------
First Quarter $ 26.00 $ 19.625
Second Quarter 27.75 23.00
Third Quarter 24.25 15.00
Fourth Quarter 21.25 15.875
1997
First Quarter $ 13.125 $ 10.375
Second Quarter 15.50 11.50
Third Quarter 20.75 15.00
Fourth Quarter 25.25 17.00
At December 31, 1998 there were approximately 620 stockholders of record.
The most recent quarterly dividend was declared by the Company on February 8,
1999, totaled $0.19 per share and was paid on March 16, 1999. The Company
declared and paid a quarterly dividend of $0.12, $0.13, $0.14, and $0.19 per
share in the first, second, third and fourth quarters of 1998. The Company
declared and paid a quarterly dividend of $0.09, $0.11, $0.11, and $0.11 per
share in the first, second, third and fourth quarters of 1997. The dividend
payout ratio was 25.2%, 28.2%, and 24.3%, in 1998, 1997 and 1996, respectively.
Annual Meeting: The Annual Meeting of Stockholders of People's Bancshares, Inc.
will be held on Tuesday, May 18, 1999.
ANNUAL REPORT ON FORM 10-K: PEOPLE'S BANCSHARES, INC.'S ANNUAL REPORT ON FORM
10-K WILL BE PROVIDED TO SHAREHOLDERS, WITHOUT CHARGE, UPON WRITTEN REQUEST TO
THE SHAREHOLDER RELATIONS DEPARTMENT.
Transfer Agent: Our Transfer Agent is responsible for our shareholder records,
issuance of stock certificates, and distribution of our dividends and the IRS
form 1099. Your requests, as shareholders, concerning these matters are most
efficiently answered by corresponding directly with State Street Bank and Trust
Co. at the following address:
State Street Bank and Trust Co.
c/o BFDS
Shareholder Communications
P.O. Box 8200
Boston, MA 02266-8200
1-800-426-5523
For additional information about People's Bancshares, Inc., please contact:
Shareholder Relations Department
People's Bancshares, Inc.
P.O. Box 3203
New Bedford, Massachusetts 02741-3203
(888) 222-9839
This Annual Report has not been reviewed or confirmed for accuracy or relevance
by the Securities and Exchange Commission.
31
<PAGE> 1
EXHIBIT 21
Schedule of Subsidiaries of the Company
Parent Company: People's Bancshares, Inc.
Subsidiaries: People's Savings Bank of Brockton
A Massachusetts Savings Bank
People's Bancshares Capital Trust
<PAGE> 1
[LOGO] One International Place
Boston, Massachusetts 02110-9801
617/439-9700 Fax 617/439-0476
1500 Main Street, Suite 1908
Springfield, Massachusetts 01103
413/747-0-42 Fax 413/739-5149
http://www.wolfandco.com
- --------------------------------------------------------------------------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Number
333-1178 (dated February 8, 1996 on Form S-8), Registration Statement Number
333-3004 (dated March 29, 1996 on Form S-8) and Registration Statement Number
333-17439 (dated December 6, 1996 on Form S-8) of People's Bancshares, Inc. of
our report dated January 26, 1999 on the financial statements of People's
Bancshares, Inc., appearing in the Annual Report on Form 10-K of People's
Bancshares, Inc. for the year ended December 31, 1998.
Wolf & Company P.C.
- -------------------
Wolf & Company P.C.
Boston, Massachusetts
March 30, 1999
Member of POLARIS (TM) INTERNATIONAL
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PEOPLE'S BANCSHARES INC. AND SUBSIDIARIES ANNUAL FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<CASH> 19,794
<INT-BEARING-DEPOSITS> 2,084
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<TOTAL-ASSETS> 944,640
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<SHORT-TERM> 10,700
<LIABILITIES-OTHER> 8,386
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<COMMON> 368
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